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2016
Annual
Report
FASTENAL
GLANCE
AT A
NTRIE S W I T H FASTEN
A
L
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E
S21
134,000+
EMPLOYEE SAFETY
COACHING, TRAINING, &
INSPECTION EVENTS
143 MILLION
MILES DELIVERED 810
MILLION POUNDS
DELIVERED
2,503
STORES
3.1%
DAILY SALES
GROWTH TO
CUSTOMERS
WITH VENDING
+
0
0
0
,
2
6
VENDING MACHINES INSTALLED
38,000+
416,054
NO. OF FASTENAL SCHOOL OF
BUSINESS COURSE COMPLETIONS
19,624
EMPLOYEES
401
$993 MILLION
INVENTORY VALUE
ONSITE
ONSITE
LOCATIONS
ACTIVE
BIN STOCKS
TABLE OF CONTENTS
Letter to Shareholders
1-3
4-5
10-Year Selected Financial
Data & Financial Highlights
6
Stock and Financial Data
NO. OF ORDERS PROCESSED
36,954,377
7
Stock Performance Highlights
8-12
INSIDE
BACK
COVER
50 years of Growth through
Customer Service
Directors
Executive Officers
Corporate Information
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2016 ANNUAL REPORT
1
LETTER TO
SHAREHOLDERS
One year ago I was in a new role – CEO of Fastenal. After 20 years
with Fastenal, I thought I knew the organization well. I knew we had
great people; I just didn’t realize how great. Blue Team members
are willing to change, to grow, and to learn on both an individual
basis and as a team. With this spirit, anything is possible.
In last year’s letter, we spoke about the results of the year, our
growth drivers, and our structural advantages. This letter is similar
in content; however, our aspirations for 2017 are much simpler –
we plan to grow our sales and our earnings.
To make this a reality, we plan to serve our customers well and to
help them improve their business. We have a name for this: Growth
Through Customer Service. We also plan to serve our employees
well, reflecting our core belief in people and a willingness to
challenge each other. Finally, we plan to better manage expenses.
Doing these three things will also serve you, our shareholders.
In 2016, our net sales grew 2.4%. The best way to understand
what happened in 2016 is to revisit some trends mentioned in
last year’s letter to shareholders. To summarize, 2015 was a
disappointing year. The growth rate of our business weakened
as the year progressed. Our net sales in the first quarter grew
about 9%, then slid to 5% growth in the second quarter, and in
September our daily sales growth went negative. We finished the
year with four negative months.
Our top 100 customers also experienced weakening trends in
2015. We are a significant supplier to each of these customers;
therefore, we feel our sales activity with this group is a good
‘proxy’ for their overall business activities. From the first quarter
of 2015 to the fourth, the number of top 100 customers with
growth in spend dropped about a third, from 75 to 49. For the 51
customers whose spend contracted with Fastenal, 37 were down
more than 10% and 21 were down more than 25%. These two
groups were about two and a half times greater in size than we
would normally expect. With these customers, our market share
continues to expand; however, the market place in which they
operate has contracted.
The weakness within our top 100 customers continued in
2016. With some variations, depending on the quarter, about 50
customers grew and about 50 contracted. The severity of the drop
with our contracting customers was only slightly better than in
2015, with about 30 customers contracting more than 10% and
about 12 customers contracting more than 25%. Both of these
were about two times the norm. In short, 2015 and 2016 were
tough years for our customers, and our success directly relates to
our customers’ success.
is
information
this customer
Understanding
to
maintaining perspective during a weakening period like 2015 and
2016. It also serves as a reminder to everyone within Fastenal of
our mission to our customers. When they’re struggling, we need
to focus our energy on providing even more ideas for savings and
improvements.
important
There is another positive to never lose sight of: The market we serve
is large, and we currently serve about 4%. A short-term weakness
in the economy has no relevance to our market opportunity or the
steps needed to grow our business long term.
As stated above, our net sales grew 2.4% in 2016; however, our
pre-tax earnings contracted 4.4%, our net earnings contracted
3.3%, and our net earnings per share (EPS) contracted 2.3%. The
latter number was helped by our repurchase of shares in 2015 and
in early 2016.
In 2016, our gross margin was 49.6%, our first annual gross margin
below 50% in ten years. This wasn’t unexpected, but it was still
a tough pill to swallow. It wasn’t unexpected because fasteners,
our highest-margin product line, now represent about 37% of our
revenue versus 52% in 2006. Fastener sales have been dropping
as a percentage of our total revenues for about 20 years, primarily
because of our success selling additional non-fastener products
to existing customers. Our industrial vending and Onsite initiatives
have accelerated this trend in recent years. Ignoring product mix,
our gross margins also weakened due to several additional factors:
(1) some deflation in steel and/or in energy prices over time, (2)
a weak macro environment for our customers, and (3) some
disruption in the marketplace. The latter is difficult to quantify, but
we believe the disruption will benefit Fastenal in the long term due
to our structural advantage (more on this later).
To make this a reality, we plan to
serve our customers well and to help
them improve their business.
We have a name for this:
Growth Through Customer Service
In 2016, our operating expenses grew just over 4%. During all of
2015, we aggressively added capacity to the organization. This
capacity consisted of about 1,700 additional store employees, about
700 additional vehicles, about 9,000 additional industrial vending
devices, and an additional layer of deployed IT infrastructure. In
2016, we dedicated around 200 non-store personnel to optimize
our industrial vending business, we upgraded around 2,000 store
locations, and deployed about 22,000 more vending devices.
These investments dictated much of our expense patterns for the
year.
As CEO, I am proud of many things we did in 2016. We managed
our expenses in a compassionate and mainly disciplined manner,
and we pulled back on the accelerator as needed.
2016 ANNUAL REPORT 2
As CEO, I am also learning, and there was one expense where we
underperformed: We did not manage our store occupancy expense
well. We will work to improve this in 2017 and 2018. Given the
previous discussion about gross margins, managing our operating
expenses will become more important over time.
Our growth drivers haven’t changed from twelve months ago. They
include the following:
National Accounts
This is really our company-wide key account program. National
account customers represent about 47% of our revenue, and this
moves closer to 60% if we expand the definition to include large
regional customers and government customers.
Today, about a quarter of this business is served by an Onsite team
or some other customer-specific location. We believe our global
capabilities provide a compelling advantage in the marketplace.
We believe this advantage allows Fastenal to push further and
faster with these customers, forcing our competitors to play catch-
up. We simply have to exceed our customers’ expectations every
day – not easy, but achievable.
Onsite Locations
An Onsite location is a ‘store’ within a customer’s facility, or
sometimes in a lower-cost facility near the customer. At the end
of 2014, we had just over 200 active Onsite locations. During
2015 we signed 80, and in 2016 we signed 176. Our success has
grown because our engagement, or participation, has grown. In
2015, about 25% of our district business units signed an Onsite
customer; in 2016, this doubled to just over 50%. Our goal in 2017
is to have 80% of our districts sign at least one Onsite customer.
If achieved, we believe this could result in 275 to 300 signings. It
might be questionable for us to publish this ambitious of a goal, but
that is the DNA of Fastenal – see the potential and challenge your
people to achieve that potential.
Industrial Vending
We started 2016 with about 55,500 vending devices installed at
customer sites and ended the year with about 62,800. The net
increase of 7,300 (or 13%) probably doesn’t sound like a big deal;
however, we ‘tuned up’ the business and removed around 9,300
underperforming devices. We think this was a good decision. It
improved the efficiency of the business, improved the financial
returns of the business, and positioned us to serve our customers
at a higher level – we like all three outcomes. As with Onsite, we
believe there is a significant growth opportunity remaining in the
industrial vending marketplace.
(For those of you possibly confused by the 7,300 vending machines
noted above versus the 22,000 devices discussed earlier in this
letter, the difference is about 15,000 devices deployed under a
locker leasing program during the year. We exclude these devices
from most of our disclosures as they don’t generate product sales,
but rather rental fees.)
Store Locations
Let’s talk about one of our basic growth drivers. Starting in late
2015, we invested heavily to upgrade about 2,000 stores through
our CSP 16 (Customer Service Project 2016) initiative. It involved
an infusion of about $54 million worth of inventory and a lot of hard
work at the local store level. We did this to improve our same-day
service capabilities and to allow our local teams to expand the
breadth of customers within their sales plans. A specific area of
The Customer Service Project really
involves a continuously evolving
inventory staging strategy, wisely
using the best available ‘shelf’ to
optimize our service.
2016 ANNUAL REPORT
3
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focus was the construction industry, positioning our stores to
provide same-day solutions for local contractors with a broader,
deeper inventory of tools, anchors, safety supplies, and other job
site needs. The higher-level goal was to improve the efficiency of
our existing distribution network. The Customer Service Project
really involves a continuously evolving inventory staging strategy,
wisely using the best available ‘shelf’ to optimize our service. This
could be in our customer’s location, a vending machine, an Onsite
location, a store, a distribution center, or at one of our suppliers –
all linked by one integrated network. Our in-house transportation
fleet connects the network. Our local presence extends it to
the ‘last mile.’
In 2017, we intend to use these four drivers to improve sales
growth and efficiencies. We also intend to focus our attention
on asset utilization, both working capital and fixed capital. After
five years of rapidly expanding our industrial vending business,
our distribution automation, and our trucking fleet, capped by an
ambitious upgrade to our store network in 2016, we have some
breathing room to improve our asset utilization and improve our
free cash flow.
Earlier we spoke about two distinct items: expense control and our
structural advantages. Let’s take a deeper dive.
In regards to expense control, two things jump out. The first
centers on occupancy. There are four primary components to our
occupancy expenses: store related (x-utilities), distribution and
manufacturing related, vending devices, and store utilities. We
didn’t do a great job managing the first one in 2016, and as noted
earlier, we will need to dig out of that hole in 2017 and 2018.
The second item centers on store employee costs. The Department
of Labor regulation changes published last spring were dramatic
and changed the economics and flexiblity of our smaller revenue
stores. We are a successful organization because we foster an
entrepreneurial environment. We felt these changes would stifle
the entrepreneurial environment for our employees and would
limit our ability to teach through success; therefore, we closed
110 stores during the second half of the year. This wasn’t the only
reason some of these locations closed, but it caused us to move
quickly and it did expand the list.
An important detail to note: We retained 95% of the customers and
employees after the store closings. We now serve these customers
out of nearby locations with the same employees.
We have discussed our structural advantage
in previous
communications. The advantage includes great people close to the
customer and a frugal culture. This allows us to deliver superior
service, to provide ‘same-day’ product availability, and to maintain
a very efficient cost structure. This combination allows Fastenal to
generate a profit and a return on investment where others struggle.
It also creates avenues of opportunity in the future.
My letter has touched on people from the standpoint of culture,
but I left out one important detail: We believe in people and their
inherent ability to do great things if given the opportunity. We
also believe our odds improve if we challenge ourselves to
pursue a common goal. We intend to always give that opportunity
and to always pursue a common goal.
In 2017, our common goal is simple – grow our sales and
grow our earnings. To accomplish this, we must be focused
on our customers, on our Blue Team, and on our operating and
administrative expenses.
This year marks Fastenal’s 50th anniversary, and I suspect we will
take several opportunities to celebrate that milestone during 2017;
but rest assured, our energy will be focused on the first steps of
our next 50 years.
We thank you for your belief in Fastenal.
Sincerely,
DANIEL L. FLORNESS
President and Chief Executive Officer
2016 ANNUAL REPORT
4
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0
1
(Amounts in Thousands Except Per Share Information)
Operating Results
Net sales
Gross profit
% of net sales
Earnings before income taxes
% of net sales
Net earnings
% of net sales
Basic net earnings per share
Basic weighted average shares outstanding
Diluted net earnings per share
Diluted weighted average shares outstanding(1)
Cash Flow Summary
Net cash provided by operating activities
% of net earnings
Less capital expenditures, net
Acquisitions and other
Free cash flow
% of net earnings
Dividends and Common
Stock Purchase Summary
Dividends paid
% of net earnings
Dividends paid per share
Purchases of common stock
% of net earnings
Common stock shares purchased
Average price paid per share
Financial Position at Year End
Operational working capital
(accounts receivable, net and inventories)
Net working capital
(current assets less current liabilities)
Fixed capital
(property and equipment, net)
Total assets
Total debt
(current portion of debt and long-term debt)
Total stockholders' equity
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
3,962,036
1,964,777
49.6%
789,729
19.9%
499,478
12.6%
1.73
288,950
1.73
289,158
2016
513,999
102.9%
(182,946)
(5,147)
325,906
65.2%
2016
346,588
69.4%
1.20
59,440
11.9%
1,600
37.15
2016
Percent
Change
2.4%
0.8%
-4.4%
-3.3%
-2.3%
-0.9%
-2.3%
-1.0%
Percent
Change
-6.0%
26.0%
-85.5%
-11.0%
Percent
Change
6.0%
7.1%
-79.7%
-77.5%
-10.0%
Percent
Change
2015
2014
2013
2012
2011
2010
2009
2008
2007
$3,869,187
1,948,934
$3,733,507
1,897,402
$3,326,106
1,719,445
$3,133,577
1,614,524
$2,766,859
1,434,172
$2,269,471
$1,930,330
$2,340,425
$2,061,819
1,174,836
1,236,092
1,047,574
50.4%
826,020
21.3%
516,361
13.3%
1.77
291,453
1.77
292,045
2015
$546,940
105.9%
(145,227)
(35,400)
366,313
70.9%
50.8%
787,434
21.1%
494,150
13.2%
1.67
296,490
1.66
297,313
2014
2013
2012
2011
2010
2009
2008
2007
$499,392
101.1%
(183,655)
(5,577)
310,160
62.8%
2015
2014
2013
2012
2011
2010
2009
2008
2007
$327,101
$296,581
$237,456
$367,306
$191,741
$182,814
$106,943
$117,474
$66,216
63.3%
1.12
292,951
56.7%
7,100
41.26
60.0%
1.00
52,942
10.7%
1,200
44.12
2015
2014
2012
2011
2010
51.5%
674,155
21.5%
420,536
13.4%
1.42
296,089
1.42
297,151
$396,292
94.2%
(133,882)
(133)
262,277
62.4%
87.3%
1.24
-
-
-
-
51.8%
575,081
20.8%
357,929
12.9%
1.21
295,054
1.21
295,869
$268,489
75.0%
(116,489)
212
152,212
42.5%
53.6%
0.65
-
-
-
-
51.8%
430,640
19.0%
265,356
11.7%
0.90
294,861
0.90
294,861
90.6%
(69,138)
(10,329)
161,021
60.7%
68.9%
0.62
-
-
-
-
51.7%
713,468
21.5%
448,636
13.5%
1.51
296,754
1.51
297,684
$416,120
92.8%
(201,550)
(145)
214,425
47.8%
52.9%
0.80
9,080
2.0%
200
45.40
2013
983,435
50.9%
297,490
15.4%
184,357
9.6%
0.62
296,716
0.62
296,716
166.0%
(47,675)
(5,133)
253,262
137.4%
58.0%
0.36
41,104
22.3%
2,200
18.69
2009
52.8%
451,167
19.3%
279,705
12.0%
0.94
297,662
0.94
297,662
92.9%
(86,923)
(72)
172,903
61.8%
42.0%
0.395
25,958
9.3%
1,180
22.00
2008
50.8%
377,899
18.3%
232,622
11.3%
0.77
301,109
0.77
301,109
98.0%
(49,830)
(265)
177,800
76.4%
28.5%
0.22
87,311
37.5%
4,172
20.93
2007
$240,488
$306,070
$259,898
$227,895
1,492,705
8.0%
$1,381,638
$1,331,301
$1,198,399
$1,087,542
$984,746
$827,502
$722,574
$809,187
$740,923
1,445,126
11.9%
1,291,610
1,207,912
1,168,629
1,082,482
1,048,320
923,513
862,855
827,410
742,980
899,697
2,668,884
390,000
1,933,094
9.9%
5.4%
6.8%
7.3%
818,889
763,889
654,850
516,427
435,601
363,419
335,004
324,182
276,627
2,532,462
2,359,102
2,075,784
1,815,832
1,684,948
1,468,283
1,327,358
1,304,149
1,163,061
365,000
90,000
-
-
-
-
-
-
-
1,801,289
1,915,217
1,772,697
1,560,360
1,458,976
1,282,512
1,190,843
1,142,259
1,010,161
All information contained in this Annual Report reflects the 2-for-1 stock split in 2011.
(1) Reflects impact of stock options issued by the Company that were in-the-money and outstanding during the period.
2016 ANNUAL REPORT
Operating Results
Net sales
Gross profit
% of net sales
% of net sales
Net earnings
% of net sales
Earnings before income taxes
Basic net earnings per share
Basic weighted average shares outstanding
Diluted net earnings per share
Diluted weighted average shares outstanding(1)
Cash Flow Summary
Net cash provided by operating activities
% of net earnings
Less capital expenditures, net
Acquisitions and other
Free cash flow
% of net earnings
Dividends and Common
Stock Purchase Summary
Dividends paid
% of net earnings
Dividends paid per share
Purchases of common stock
% of net earnings
Common stock shares purchased
Average price paid per share
Financial Position at Year End
Operational working capital
(accounts receivable, net and inventories)
Net working capital
(current assets less current liabilities)
Fixed capital
(property and equipment, net)
Total assets
Total debt
(current portion of debt and long-term debt)
Total stockholders' equity
2016
3,962,036
1,964,777
49.6%
789,729
19.9%
499,478
12.6%
1.73
288,950
1.73
289,158
2016
513,999
102.9%
(182,946)
(5,147)
325,906
65.2%
2016
346,588
69.4%
1.20
59,440
11.9%
1,600
37.15
2016
Percent
Change
2.4%
0.8%
-4.4%
-3.3%
-2.3%
-0.9%
-2.3%
-1.0%
Percent
Change
-6.0%
26.0%
-85.5%
-11.0%
Percent
Change
6.0%
7.1%
-79.7%
-77.5%
-10.0%
Percent
Change
2015
2014
2013
2012
2011
2010
2009
2008
2007
FINANCIAL HIGHLIGHTS
5
$3,869,187
1,948,934
$3,733,507
1,897,402
$3,326,106
1,719,445
$3,133,577
1,614,524
$2,766,859
1,434,172
51.7%
713,468
21.5%
448,636
13.5%
1.51
296,754
1.51
297,684
51.5%
674,155
21.5%
420,536
13.4%
1.42
296,089
1.42
297,151
51.8%
575,081
20.8%
357,929
12.9%
1.21
295,054
1.21
295,869
$2,269,471
$1,930,330
$2,340,425
$2,061,819
1,174,836
51.8%
430,640
19.0%
265,356
11.7%
0.90
294,861
0.90
294,861
983,435
50.9%
297,490
15.4%
184,357
9.6%
0.62
296,716
0.62
296,716
1,236,092
1,047,574
52.8%
451,167
19.3%
279,705
12.0%
0.94
297,662
0.94
297,662
50.8%
377,899
18.3%
232,622
11.3%
0.77
301,109
0.77
301,109
2014
2013
2012
2011
2010
2009
2008
2007
$416,120
92.8%
(201,550)
(145)
214,425
47.8%
$396,292
94.2%
(133,882)
(133)
262,277
62.4%
$268,489
75.0%
(116,489)
212
152,212
42.5%
$240,488
$306,070
$259,898
$227,895
90.6%
(69,138)
(10,329)
161,021
60.7%
166.0%
(47,675)
(5,133)
253,262
137.4%
92.9%
(86,923)
(72)
172,903
61.8%
98.0%
(49,830)
(265)
177,800
76.4%
2015
2014
2013
2012
2011
2010
2009
2008
2007
$327,101
$296,581
$237,456
$367,306
$191,741
$182,814
$106,943
$117,474
$66,216
52.9%
0.80
9,080
2.0%
200
45.40
2013
87.3%
1.24
-
-
-
-
53.6%
0.65
-
-
-
-
68.9%
0.62
-
-
-
-
2012
2011
2010
58.0%
0.36
41,104
22.3%
2,200
18.69
2009
42.0%
0.395
25,958
9.3%
1,180
22.00
2008
28.5%
0.22
87,311
37.5%
4,172
20.93
2007
50.4%
826,020
21.3%
516,361
13.3%
1.77
291,453
1.77
292,045
2015
$546,940
105.9%
(145,227)
(35,400)
366,313
70.9%
63.3%
1.12
292,951
56.7%
7,100
41.26
50.8%
787,434
21.1%
494,150
13.2%
1.67
296,490
1.66
297,313
$499,392
101.1%
(183,655)
(5,577)
310,160
62.8%
60.0%
1.00
52,942
10.7%
1,200
44.12
2015
2014
1,492,705
8.0%
$1,381,638
$1,331,301
$1,198,399
$1,087,542
$984,746
$827,502
$722,574
$809,187
$740,923
1,445,126
11.9%
1,291,610
1,207,912
1,168,629
1,082,482
1,048,320
923,513
862,855
827,410
742,980
899,697
2,668,884
390,000
1,933,094
9.9%
5.4%
6.8%
7.3%
818,889
763,889
654,850
516,427
435,601
363,419
335,004
324,182
276,627
2,532,462
2,359,102
2,075,784
1,815,832
1,684,948
1,468,283
1,327,358
1,304,149
1,163,061
365,000
90,000
-
-
-
-
-
-
-
1,801,289
1,915,217
1,772,697
1,560,360
1,458,976
1,282,512
1,190,843
1,142,259
1,010,161
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
All information contained in this Annual Report reflects the 2-for-1 stock split in 2011.
(1) Reflects impact of stock options issued by the Company that were in-the-money and outstanding during the period.
2016 ANNUAL REPORT 6
STOCK
AND
FINANCIAL
DATA
(Dollar amounts in Thousands
Except Share and
Per Share Information)
Common Stock Data
Our shares are traded on The NASDAQ Stock Market under the symbol ‘FAST.’ The following
table sets forth, by quarter, the high and low closing sale price of our shares on The NASDAQ
Stock Market for the last two years(1).
2016
High
Low 2015
High
Low
First quarter
$49.87
$36.53 First quarter
$47.40
$39.82
Second quarter
Third quarter
Fourth quarter
48.93
45.36
49.17
42.70 Second quarter
39.92 Third quarter
38.16 Fourth quarter
43.41
42.82
41.64
40.01
36.13
35.50
(1) The closing sale price was obtained from Shareholder.com, a division of Nasdaq OMX.
As of January 20, 2017, there were approximately 1,100 record holders of our common stock, which includes nominees or broker
dealers holding stock on behalf of an estimated 205,000 beneficial owners.
In 2016 and 2015, we paid dividends per share totaling $1.20 and $1.12, respectively. On January 17, 2017, we announced
a quarterly dividend of $0.32 per share to be paid on February 28, 2017 to shareholders of record at the close of business on
February 1, 2017. 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.
We purchased 1,600,000 shares of our common stock in 2016 at an average price of $37.15 per share. In 2015, we purchased
7,100,000 shares of our common stock at an average price of $41.26 per share.
I
)
D
E
T
I
D
U
A
N
U
(
A
T
A
D
L
A
C
N
A
N
I
F
Y
L
R
E
T
R
A
U
Q
D
E
T
C
E
L
E
S
2016
Net
Sales
First quarter
$
986,680
Second quarter
1,014,287
Third quarter
1,013,122
Fourth quarter
947,947
Gross
Profit
491,460
501,592
499,834
471,891
Pre-tax
Earnings
Net
Earnings
Basic
Net Earnings
per Share (1)
Diluted
Net Earnings
per Share
199,851
207,817
201,239
180,822
126,227
131,521
126,925
114,805
0.44
0.46
0.44
0.40
1.73
0.44
0.45
0.44
0.40
1.73
Total
$
3,962,036
1,964,777
789,729
499,478
2015
Net
Sales
First quarter
$
953,317
Second quarter
997,827
Third quarter
Fourth quarter
995,250
922,793
Gross
Profit
484,050
502,087
502,225
460,572
Total
$
3,869,187
1,948,934
(1) Amounts may not foot due to rounding difference.
Pre-tax
Earnings
Net
Earnings
Basic
Net Earnings
per Share
Diluted
Net Earnings
per Share
203,512
225,099
219,204
178,205
826,020
127,606
140,357
136,494
111,904
516,361
0.43
0.48
0.47
0.39
1.77
0.43
0.48
0.47
0.39
1.77
2016 ANNUAL REPORT
7
STOCK PERFORMANCE
HIGHLIGHTS(1), (2)
Invested $9,000 on August 20, 1987
Value on December 31, 2016: $4,510,080
Stock Split
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
7
8
9
1
9
8
9
1
1
9
9
1
3
9
9
1
5
9
9
1
7
9
9
1
9
9
9
1
1
0
0
2
3
0
0
2
5
0
0
2
7
0
0
2
9
0
0
2
1
1
0
2
3
1
0
2
5
1
0
2
7
1
0
2
S We have paid dividends in every year since 1991.
R
E
D
L
O
H
E
R
A
H
S
O
T
S
N
R
U
T
E
R
Since going public in 1987, we have maintained a consistent
focus on avoiding, if feasible, the potentially dilutive impact of our
activities on our shareholders. To this end, we have grown our
organization principally with internal cash flow, have supported
the Fastenal Company and Subsidiaries 401(k) and Employee
Stock Ownership Plan with stock purchased in the open market,
and, since creating a stock option program in 2003, have
periodically purchased common stock in the open market to,
among other things, offset the potential impact of our stock option
grants. We have purchased approximately 20.0 million shares
since 2003, and, have granted our employees options to purchase
approximately 12.6 million shares. (Note: These amounts have
been adjusted to reflect the impact of stock splits.) This philosophy
has allowed us to balance internal investment with cash returns to
shareholders. In the last five years, we have spent $847 million in
net capital expenditures and returned $1,989 million to investors
through dividends and share purchases, all while maintaining a
conservative balance sheet.
INITIAL PUBLIC OFFERING (IPO)
On August 20, 1987 (date of our initial public offering), 1,000 shares
of our stock sold for $9,000. Approximately 29 years later, on
December 31, 2016, those 1,000 shares, having split seven times,
were 96,000 shares worth $4,510,080, for a gain of approximately
23.9% compounded annually. (In addition, the holder of these shares
would have received $784,224 in dividends since August 20, 1987,
for a total gain of approximately 24.6% compounded annually.)
TEN YEARS
On December 31, 2006, 1,000 shares of our stock sold for $35,880. Ten
years later, on December 31, 2016, those 1,000 shares, having split
once, were 2,000 shares worth $93,960, for a gain of approximately
10.1% compounded annually. (In addition, the holder of these shares
would have received $15,210 in dividends since December 2006, for
a total gain of approximately 11.8% compounded annually.)
FIVE YEARS
On December 31, 2011, 1,000 shares of our stock sold for $43,610.
Five years later, on December 31, 2016, those 1,000 shares were
worth $46,980 for a gain of approximately approximately 1.5%
compounded annually. (In addition, the holder of these shares would
have received $5,360 in dividends since December 2011, for a total
gain of approximately 3.7% compounded annually.)
(1) The share data represents past performance, which is no guarantee of future results.
(2) The dollar amounts above are presented in whole numbers versus thousands or
millions as is prevalent in the remainder of this document.
E
C
N
A
M
R
O
F
R
E
P
K
C
O
T
S
L
A
C
R
O
T
S
H
I
I
2016 ANNUAL REPORT
8
in boxes
IT ALL STARTED HERE
While working in his dad’s auto
supply shop in Winona, Minnesota,
11-year-old Bob Kierlin observed
that the fasteners they sold were
all pre-packaged
that
happened to be about the same size
as a pack of cigarettes. This got him
thinking: If packs of cigarettes can be
vended, why not boxes of fasteners?
The question stuck with him
The question stuck with him
through the years, ultimately
through the years, ultimately
inspiring Fastenal’s original
inspiring Fastenal’s original
business plan.
WITH A LITTLE HELP
FROM MY FRIENDS
After being turned down by at least 30 potential investors,
Kierlin fi nally convinced four friends – Van McConnon, Jack
Remick, Steve Slaggie and, later, Mike Gostomski – to help
get his business idea off the ground. The vision was to create
a completely self-service fastener store in Winona lined with
vending machines capable of dispensing small boxes of nuts,
bolts, and screws.
Top Row (L-R) Bob Kierlin, Van McConnon, Jack Remick
Bottom Row (L-R) Steve Slaggie, Mike Gostomski
OUR FIRST
G
N
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A
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B
E
L
E
C
50 YEARS OF
GROWTH THROUGH
ROLL OUT THE BARRELS
The company’s early survival hinged on two imperatives: waste nothing and buy as much
bulk inventory as possible. Before long, kegs of fasteners fi lled the store, the basement, and
various garages around town, at which point it occurred to Bob and the gang that they could
grow a lot faster if they spread all that product out to other markets. The fi rst store outside of
Winona was Rochester, MN (1971), followed by La Crosse, WI (1974), Dubuque, IA (1975), Eau
Claire, WI (1976), and Mankato, MN (1977).
A PENNY SAVED
Bob’s laser focus on cost control fostered a culture of
extreme frugality. Fastener kegs were repurposed as
offi ce chairs. Customer orders were packed in surplus
toothpaste boxes (purchased for three cents each). And
the thermostat at headquarters was set to a refreshing
55 degrees in the dead of winter. This no-frills approach
enabled the team to pour every penny into growing
the business.
Rochester, MN
2016 ANNUAL REPORT
La Crosse, WI
La Crosse, WI
Van McConnon and Jack Remick in the original
Van McConnon and Jack Remick in the original
(Winona, MN) store
WHY “FASTENAL”?
Bob envisioned that there would one day be hundreds of
machines set up across the country, all serviced by a fl eet
of gleaming semis bearing the company’s name: “Lightning
Bolts,” with a streak of lightning underlining the letters. … This
vision quickly evaporated when Steve and Jack threatened
to withdraw their money unless they came up with a better
name. After much head-scratching and debate, they fi nally
settled on “Fastenal” because they fi gured people would use
their products to “fasten all” kinds of things.
9
A STORE IS BORN
In 1967, they rented a space for the test store,
ordered 1,400 bags of fasteners to go into the yet-
to-be-built prototype machines, held a grand opening
to generate some cash … and promptly discovered
that customers wanted fastener sizes and quantities
that couldn’t possibly be vended. According to Van
McConnon, Bob seemed unfazed by the revelation:
“He just said, ‘Well, Van, why don’t you just start
making sales calls and sell some nuts and bolts?’”
With that, the vending concept was tabled and
Fastenal’s store-based, outside-sales-driven business
model was born.
…AND WHY
…AND WHY
SO BLUE?
The “Blue Team” may very well
have ended up as the “Yellow
Team” or even the “Red Team”
if it weren’t for an industrial
design textbook called Human
Engineering. This is where Bob
originally learned that blue on
white is the most legible and
impactful color combination
for text.
CUSTOMER SERVICE
WHEELS OF PROGRESS
With the launch of additional stores, the Winona location took on the role of
a (primitive) distribution center. John Newell, the assistant manager, would
fi eld phone calls from the other stores, jot down their product requests on
pieces of scrap paper, and stick them on a screw that had been drilled
through a two-by-four. Once a week, the Winona team would sift through
the impaled notes and pull all the orders. Store personnel would have to
drive to Winona to pick up their products, often letting themselves into the
store at night or over the weekend to fi nd their designated “pile.”
It wasn’t until 1975 that stores began receiving sporadic truck deliveries
from Winona (via a salvaged half-ton fl atbed truck known as “the White
Knight”). In 1981 we hired our fi rst full-time truck driver, Bob Wittenberg;
and within a few years, the rough contours of Fastenal’s distribution system
began to take shape, with a growing fl eet of trucks running increasingly
frequent routes to surrounding stores.
(Above) Fastenal’s fi rst semi drivers: Steve
(Above) Fastenal’s fi rst semi drivers: Steve
Thicke, Rick Todd, and Bob Wittenberg
(Far left) Our fi rst truck after “the White
Knight” was a 135-horsepower Mercedes
capable of achieving speeds as high as 57
m.p.h.!
(Left) Steve Thicke, looking relieved that we
eventually moved on to bigger and better
trucks
2016 ANNUAL REPORT
10
Steve Jacobson and Jeff
Klint at Fastenal’s second
Twin Cities location
THE POWER
OF FASTENAL
PEOPLE
Fastenal really began to
hit its stride in the early
1980s. The strategy was
pretty basic: place products and people close to the customer and
empower everyone in the organization to make decisions, take
risks, and share the success of their company. As Bob Kierlin later
refl ected, “Our growth was really driven by our belief in people and
what they could do if given an opportunity.”
DO-IT-YOURSELF MANUFACTURING
When Fastenal’s headquarters were relocated to a larger building
in 1982, two small rooms were set aside to accommodate a
vertical mill, a lathe, a horizontal grinding machine, a cut-off
machine, and a de-burring machine – all operated by a single
machinist. This added a critical dimension to our service,
enabling sales people to respond to customer demands for
hard-to-fi nd parts with two winning questions: How many do
you need? And when do you need them?
OUR FIRST
G
N
I
T
A
R
B
E
L
E
C
50 YEARS OF
GROWTH THROUGH
MORE THAN JUST
NUTS & BOLTS
Everyone who uses a fastener needs to apply it with
some kind of tool. … This simple truism spurred
Fastenal’s foray into non-fastener product lines
starting in the early 1990s. At fi rst, tools and other
MRO supplies were sold in separate “FastTool”
located adjacent to existing Fastenal
stores
locations, but within a few years everything was
combined in our regular Fastenal stores. The tool
expansion essentially doubled our sales opportunity
in each market, in turn making it feasible to open
stores in towns half the size. Following the same
logic, each subsequent product line rollout brought
us closer to our customers.
MEANWHILE, BACK
AT THE WAREHOUSE
For our fi rst 20 years, Winona was home
to Fastenal’s lone distribution center.
That changed in 1987 when a second
warehouse was opened in Indianapolis
with one driver and one guy running
the warehouse (the forebears of our
“I-Hub” master DC). For our next hub
opening, we traveled all the way to
Scranton, Pennsylvania, then to Dallas,
Atlanta, and eventually all over the
country (and beyond), gradually shifting
from a Winona-centric model to a truly
regionalized system. “It was all geared
toward taking care of the customer as
quickly as possible,” said Bob Kierlin.
“That’s really the goal of
everything we do with our
distribution network.”
2016 ANNUAL REPORT
I-Hub (Indianapolis, IN), early 1990s
I-Hub (Indianapolis, IN), early 1990s
11
GOING PUBLIC
Fastenal
faced some growing
pains heading into the mid-1980s.
A cash crunch was making it
diffi cult to grow the company at full throttle. Meanwhile, the founders were
struggling to fi nd a way to give employees an ownership stake in the business they
were all working so hard to build. With this as backdrop, in 1987 the decision was
made to take the company public. It was a modest IPO (one million shares sold for $9
per share), but it set the stage for remarkable growth. Fastenal’s sales soared from
roughly $20 million in 1987 to around $400 million in 1997; and our store count, which
stood at just over 50 at the time of the IPO, surpassed 800 by the end of the 1990s.
CUSTOMER SERVICE
MOVING CLOSER TO OUR CUSTOMERS…
The evolution of Fastenal’s business can be described as a journey deeper and deeper into
the service of our customers. In the 1980s we set up our fi rst jobsite trailers, providing a
mobile “store” in the middle of a construction site. In 1992, we added a new twist by opening
our fi rst store within a customer facility. This was a purely practical decision. The customer
needed more inventory than we could fi t in our local store in Manitowoc, WI, so they invited
us to move in – a fortuitous beginning to our Onsite service model.
…AND EXPANDING
OUR HORIZONS
Our journey of service eventually led our teams beyond
the U.S. borders. In 1994, we opened our fi rst store in
Canada, planting a seed that within 20 years would
grow into a quarter-billion-dollar business with 1,200-
plus employees. In 2001, we started doing business in
Mexico. That same year we opened up in Singapore, our
fi rst Asia Pacifi c sales location. And we’ve since opened
sales locations all over the world, providing local service
to our customers as they globalized their operations.
2016 ANNUAL REPORT
AN EXTREME STORE MAKEOVER
By 2001, Fastenal had 1,000-plus stores spanning all 50 states, but most
of them were better suited for outside sales than walk-in business. A
dramatic transformation began in 2002 with the launch of the Customer
Service Project, better known as CSP. It involved relocating stores to
more prominent locations, shifting inventory from the hubs to the stores,
creating store front rooms with open fl oor plans and retail fi xtures, and
streamlining systems to speed up invoicing. It all added up to faster
service and a much more inviting customer experience.
12
FSB IS IN SESSION
Opening hundreds of new stores meant developing thousands of employees
to run them. … Enter the “Devos” (aka the Development Team), a group of
seasoned store managers tasked with traveling the country to train new
team members in store back rooms, distribution centers, and other makeshift
classrooms. In the late ‘90s we took our training efforts to the next level by
developing a full-fl edged corporate university, the Fastenal School of Business
(FSB). Launched in 1999 with just two classes, FSB later merged with the Devos
to provide an ever-expanding offering of courses via regional campuses and, in
recent years, a robust virtual campus.
OUR FIRST
G
N
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A
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B
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C
50 YEARS OF
GROWTH THROUGH
CUSTOMER SERVICE
THE NEXT CHAPTER
Most analysts agree that the current North American market potential
for Fastenal is at least $100 billion, and many would say it’s closer to
$150 billion. Our current sales represent around four percent of that
market – i.e., for every four dollars we have today, there are 96 dollars
potentially to be gained. In short, as far as we’ve come during our fi rst
50 years, our journey is likely just beginning.
COMING FULL CIRCLE
COMING FULL CIRCLE
Nearly forty years after starting the business, we fi nally realized Bob Kierlin’s
dream of dispensing industrial supplies out of vending machines. It took a while
for our vending program to gain traction when it fi rst rolled out in late 2008, but
as stores began to embrace the value of vending (as a customer solution and
a growth driver), the number of Fastenal machines installed at customer sites
skyrocketed – from just over 7,000 at the close of 2011, to nearly 63,000 by the
close of 2016.
2016 ANNUAL REPORT
Sioux Falls, South Dakota Fastenal store
Sioux Falls, South Dakota Fastenal store
CELEBRATING OUR FIRST 50 YEARS.
FOCUSED ON OUR NEXT 50 YEARS.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________________
FORM 10-K
(Mark One)
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016,
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-16125
FASTENAL COMPANY
(Exact name of registrant as specified in its charter)
Minnesota
(State or other jurisdiction of
incorporation or organization)
2001 Theurer Boulevard
Winona, Minnesota
(Address of principal executive offices)
41-0948415
(I.R.S. Employer
Identification No.)
55987-0978
(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
Common Stock, par value $.01 per share
Name of Each Exchange on Which Registered
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
No
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
No
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
No
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
No
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.
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
Accelerated Filer
Non-accelerated Filer
(Do not check if a smaller reporting company)
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
No
The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2016, the last
business day of the registrant's most recently completed second fiscal quarter, was $12,778,423,898, 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, 2016 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 20, 2017, the registrant had 289,247,424 shares of Common Stock issued and outstanding.
FASTENAL COMPANY
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Properties
Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
Index to Exhibits
Page
3
9
14
14
15
15
16
17
18
38
39
57
57
58
59
61
61
61
61
62
63
65
66
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the annual meeting of shareholders to be held Tuesday, April 25, 2017 ('Proxy Statement')
are incorporated by reference in Part III. Portions of our 2016 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, failure to accurately predict the market potential of
our business strategies, the introduction or expansion of new business strategies, weak acceptance or adoption of our vending
or Onsite business models, increased competition in industrial vending or Onsite, difficulty in maintaining installation quality
as our industrial vending business expands, the leasing to customers of a significant number of additional industrial vending
machines, the failure to meet our goals and expectations regarding store openings, store closings, or expansion of our industrial
vending or Onsite operations, changes in the implementation objectives of our business strategies, difficulty in hiring,
relocating, training, or retaining qualified personnel, 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.
All information contained in this Form 10-K reflects the two-for-one stock split in 2011.
STOCK SPLIT
2
PART I
ITEM 1.
BUSINESS
Note – Information in this section is as of year end unless otherwise noted. The year end is December 31, 2016 unless
additional years are included or noted.
Our Internet address for corporate and investor information is www.fastenal.com. The information contained on our website or
connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered
part of this report.
Overview
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 opened our first store
in 1967 in Winona, Minnesota, a city with a population today of approximately 27,000. We began with a marketing strategy of
supplying threaded fasteners to customers in small, medium-sized, and, in subsequent years, large cities. Over time, that
mandate has expanded to a broader range of industrial and construction supplies that we break into twelve product lines
(described later in this document). The large majority of our transactions are business-to-business, though we also have some
'walk-in' retail business. At the end of 2016, we had 2,503 store locations in 21 countries supported by 14 distribution centers in
North America (eleven in the United States, two in Canada, and one in Mexico), and we employed 19,624 people. We believe
our success can be attributed to our ability to offer our customers a full line of products and services from convenient locations,
as well as to the high quality of our employees.
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:
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
Net sales (in
millions)
Number of
stores
$3,962.0
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
2,503
2,622
2,637
2,687
2,652
2,585
2,490
2,369
2,311
2,160
The following table provides a summary of the store locations we operated at the end of each year, as well as the store
openings, closings, and conversions during each year:
North America
Outside North America
United
States
Canada Mexico
Puerto Rico
and
Dominican
Republic
Central
& South
America
(1)
Asia
(2)
Southeast
Asia
(3)
Europe
(4)
Africa
(5)
Total as of
December 31, 2014
Opened stores
Closed stores
Converted stores(6)
Total as of
December 31, 2015
Opened stores
Closed stores
Converted stores(6)
2,336
202
32
(44)
(4)
4
(4)
(2)
2,320
200
27
(140)
(13)
3
(3)
(2)
44
3
—
—
47
5
—
—
Subtotal
2,590
39
(48)
(6)
8
—
—
—
8
2,575
—
35
— (143)
(15)
—
9
1
(1)
—
9
—
(1)
—
10
1
(1)
—
10
—
—
—
7
—
—
—
7
—
—
—
20
—
—
—
20
4
—
—
Total
2,637
41
(50)
(6)
1
—
—
—
1
2,622
1
40
— (144)
(15)
—
198
2,194
Total as of
December 31, 2016
(1) Panama, Brazil, Colombia, and Chile
(2) China and India
(3) Singapore, Malaysia, and Thailand
(4) The Netherlands, Hungary, United Kingdom, Germany, Czech Republic, Italy, Romania, Poland, and Sweden
(5) South Africa
(6) Converted stores are sites converted from stores to non-store selling locations, net of sites converted from non-store selling
2,452
10
24
52
2
8
7
8
2,503
locations to stores.
3
Our stores represent the foundation of our service approach, putting us close to the customer and providing an efficient means
of providing them with a broad range of products and services on a timely basis. We believe there are few companies that offer
our store coverage on a national basis. We are constantly evaluating the efficacy of our store network. There are times when
this leads us to open new locations. We select these new locations based on their proximity to our distribution network,
population statistics, and employment data for manufacturing and non-residential construction. We stock all new stores with
inventory drawn from all of our product lines, and over time, our district and store personnel may tailor the inventory offering
to the needs of the local customer base. In both 2016 and 2015, we opened new stores at a rate of approximately 2%. Our store
network evaluations also reveal locations that are candidates for closure, consolidation, or conversion, as was the case in 2016
and 2015. This resulted in a net decrease in store locations in each of the last two years.
We currently have several versions of selling locations. (1) A 'traditional store' services a wide variety of customers and stocks a
wide selection of the products we offer. (2) An 'overseas store' focuses on manufacturing customers and our fastener product
line and is the format we typically deploy outside the United States and Canada. (3) A 'strategic account store' is a unique
location that sells to multiple large accounts in a market. (4) A 'strategic account site' is similar to a strategic account store, but
typically operates out of an existing store rather than from a unique location. (5) An 'Onsite location' is a selling unit located in
or near a customer's facility that sells product solely to that customer. Because traditional, overseas, and strategic account stores
sell to multiple customers, they are included in our total store count. Neither strategic account sites nor Onsite locations are
included in our total store count because strategic account sites operate from an existing store location and Onsite locations
represent a customer subset of an existing store location.
We have long maintained that marketplace demographics could support a North American network of 3,500 stores. We
continue to believe this, but since establishing this figure our strategy has changed. Store openings, at least in their historical
sense (the 'traditional store'), are no longer our primary growth driver. At this point, the emergence of, and increased investment
in, new growth drivers and business models make it unlikely that we will approach the total store potential of North America.
These new growth drivers include industrial vending, Onsite locations, and end market growth investments (CSP 16, for
example), as well as the investment in sales personnel (both store and non-store) to support them. These represent alternative
means to address the requirements of certain customer groups. They also get us even closer to our customers than the
traditional store, which has always been core to Fastenal’s strategy and an effective means of providing differentiated and
'sticky' service that is very difficult for large and small competitors to replicate. These growth drivers appear to have substantial
market opportunities of their own. For instance, we believe the market could support approximately 1.7 million industrial
vending machines. We have also identified over 15,000 customer locations with potential to implement the Onsite service
model. We remain committed to a large, robust store network; it remains the indispensable foundation of our business. Still,
our store count peaked in 2013 and has declined in each of the three years since, and more often than not going forward, it will
likely be difficult to know if our total store count will increase or decrease in any given year. In contrast, we expect to grow
our installed base of industrial vending machines and increase our Onsite locations meaningfully over time.
We plan to open additional selling locations outside of the United States in the future. The selling locations outside of the
United States contributed approximately 12% of our consolidated net sales in 2016, with approximately 49% and 30% of this
amount attributable to our Canadian and Mexican operations, respectively.
It has been our experience that our profitability is affected by the age of our store base. New stores tend to be less profitable
due to start-up costs and the time necessary to generate a customer base. A new store generates most of 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. To illustrate, of the 17 stores opened
in the first quarter of 2016, nine were profitable in the fourth quarter of 2016. It has also been our experience that when these
new stores mature and increase their sales base, their profitability similarly increases.
4
The data in the following table shows the change in the average sales of our stores from 2015 to 2016 based on the age of each
store. The stores opened in 2016 contributed approximately $14,900 (or approximately 0.4%) of our consolidated net sales in
2016, with the remainder coming from stores opened prior to 2016 or from our non-store business. 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) and our Onsite locations. Onsite locations are considered an extension of the store in which the
customer relationship originated; therefore, we include the average sales of our Onsite locations in the year in which the 'home
store' opened.
Age of Stores on
December 31, 2016
0-1 year old
1-2 years old
2-3 years old
3-4 years old
4-5 years old
5-6 years old
6-7 years old
7-8 years old
8-9 years old
9-10 years old
10-11 years old
11-12 years old
12-16 years old
16+ years old
Year
Opened
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2001-2004
1967-2000
Number of
Stores in Group on
December 31, 2016
Closed
Stores(1)
Converted
Stores(2)
Average
Monthly
Sales
2016
41
29
19
43
57
88
101
54
118
129
196
195
581
852
0/0
11/0
3/2
4/3
10/5
18/4
7/7
3/4
12/6
12/3
19/2
7/3
22/5
16/6
$
1/0
-1/0
0/0
-1/-2
-3/0
-3/0
0/-1
0/-1
-2/-2
0/0
-2/0
0/0
-1/0
-3/0
30 (3)
105
130
134
117
114
114
151
103
115
116
103
120
166
Average
Monthly
Sales
2015
N/A
25 (3)
123
111
114
117
111
157
103
113
117
101
119
164
Percent
Change
—
320.0%
5.7%
20.7%
2.6%
-2.6%
2.7%
-3.8%
0.0%
1.8%
-0.9%
2.0%
0.8%
1.2%
(1) We closed 144 and 50 stores in 2016 and 2015, respectively. The number of closed stores is noted in the table above as 2016
number/2015 number.
(2) We converted 16 and six stores to non-store selling locations in 2016 and 2015, respectively, and converted one non-store
selling location to a store in 2016. The number of net converted stores is noted in the table above as 2016 number/2015
number.
(3) The average monthly sales include sales from stores open for less than the full fiscal year.
We introduced our industrial vending offering in 2008. The initiative began to gain significant traction in 2011, and has since
been an expanding component of our business. From the start, we believed vending could be transformative to industrial
distribution because it provided our customers the benefits of reduced consumption, reduced purchase orders, reduced product
handling, and 24-hour product availability. We also believed we had a ‘first mover’ advantage with the technology and a market
advantage by virtue of our extensive store network. With approximately 62,800 units in the field at the end of 2016, vending is
not a new initiative for us. However, we believe it has proven its effectiveness in strengthening our relationships with
customers and helped to streamline the supply chain where it has been utilized. We also believe there remains considerable
room between our current installed base and the potential installed base of the market. As a result, we anticipate continued
growth in installed units over time.
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 3.5 million square feet of distribution
capacity. These distribution centers are located so as to permit deliveries of two to five times per week to our stores using our
trucks and overnight delivery by surface common carrier. As the number of our selling locations 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, North Carolina, and Ontario,
Canada distribution centers with automated storage and retrieval systems or 'ASRS'. These nine distribution centers operate
with greater speed and efficiency, and currently handle approximately 85% 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. We intend to invest in this type of ASRS distribution infrastructure over the next several years at our Washington
and Kansas distribution centers.
5
Our information systems department develops, implements, and maintains the computer based technology used to support
business functions within Fastenal. Corporate, e-business, distribution center, and vending systems are primarily supported
from central locations, while each selling location uses a locally installed Point-Of-Sale (POS) system. The systems consist of
both customized, purchased, and licensed software. A dedicated Wide Area Network (WAN) is used to provide connectivity
between systems and authorized users.
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 2016, 2015, and 2014 and
approximately 33%, 34%, and 36% of our consolidated sales in 2016, 2015, and 2014, 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 machines. The most significant of these is our safety supplies product line, which accounted for approximately 15%,
14%, and 13% of our sales in 2016, 2015, and 2014, respectively.
Detailed information about our sales by product line is provided 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%, 12%, and 11% of our consolidated net sales in 2016, 2015, and
2014, respectively. 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 selling
locations, from individual selling locations, 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. Non-store selling locations stock inventory based on customer-specific arrangements. Inventories in distribution
centers are established from computerized data for the selling locations served by the respective distribution center. Inventory
quantities are continuously re-balanced utilizing an automated transfer mechanism we call 'inventory re-distribution'.
Manufacturing and Support Services Operations
In 2016, approximately 96% of our consolidated net sales were attributable to products manufactured by other companies to
industry standards or to customer specific requirements. The remaining 4% 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.
6
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 2016.
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 net 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 (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 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 2016, our total number of active customer accounts (defined as accounts having purchase activity
within the last 90 days) was approximately 400,000, 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 106,000.
In 2016, 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 2016 and 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 selling locations
(primarily stores) in small, medium, and large markets, each offering a wide variety of products, is a competitive selling
advantage. 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 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).
7
Our Onsite service model provides us with a strategic advantage with our larger customers. Building on our core business
strategy of the local store, the Onsite model provides value to our customers through customized service while giving us a
competitive advantage through stronger relationships with those customers, all with a relatively low investment given the
existing store and distribution structure.
Employees
We employ a total of 19,624 full and part-time employees, most of whom are employed at a store or an Onsite location. We
characterize these personnel as follows:
Store and Onsite
Non-store selling
Selling subtotal
Distribution
Manufacturing
Administrative
Non-selling subtotal
Total
2016
2015
12,966
1,575
14,541
3,403
594
1,086
5,083
19,624
13,961
1,566
15,527
3,459
662
1,098
5,219
20,746
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.
Our employees are not subject to any collective bargaining agreements 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.
8
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 our 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. We are actively seeking to expand our sales to certain categories of
customers, some of whose businesses may entail heightened levels of such 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.
We may be unable to meet our goals regarding the growth drivers of our business. Our sales 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. In recent years, however, we have devoted increased resources to other
growth drivers, including our industrial vending business (which is discussed in more detail below), our Onsite business, and
our national accounts team. While we have taken steps to build momentum in the growth drivers of our business, we cannot
assure you those steps will lead to additional sales growth. Failure to achieve any of our goals regarding industrial vending,
Onsite locations, national accounts signings, our CSP 16 (Customer Service Project 2016) initiative, or other growth drivers
could negatively impact our long-term sales growth.
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. 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 margins than our fastener products. Also, as noted below, 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. Reductions in our volume of purchases can adversely impact gross profit by reducing supplier
volume allowances. During 2016 and 2015, our gross profit continued to be adversely impacted by changes in customer and
product mix. The decrease in 2015 was amplified by a reduction in our customers' discretionary spending in the fourth quarter.
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 more competitive 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 above, 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.
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'
9
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 or difficulties transitioning our industrial vending hosting services
could be disruptive.
The ability to identify new products and product lines, and integrate them into our selling locations 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 selling locations could impact labor costs, sales
at existing selling locations, and the successful execution of our growth drivers. 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.
Our inability to transition key executive officers may divert the attention of other members of our senior management from
our existing operations. Our success depends on the efforts and abilities of our senior management and we have had some
transition in our executive officers over the last few years. Difficulties in smoothly implementing that transition, or of recruiting
suitable replacements in the event of unsuccessful transitions, could divert the attention of other members of our senior
management team from our existing operations.
We may not be able to compete effectively against our competitors, which could cause us to lose market share or erode our
operating income. 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.
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.
In the event of a cyber security incident, we could experience certain operational interruptions, incur substantial additional
costs, become subject to legal or regulatory proceedings, or suffer damage to our reputation in the marketplace. 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, 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. 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 cyber security incidents cannot be eliminated entirely. While we also seek
to obtain assurances that third parties we interact with will protect confidential information, there is a risk the confidentiality of
10
data held or accessed by third parties may be compromised. If a compromise of our data security were to occur, it could
interrupt our operations, subject us to additional legal, regulatory, and operating costs, and damage our reputation in the
marketplace.
Our business is subject to a wide array of laws and regulations in every jurisdiction where we operate. Compliance with
these laws and regulations increases the cost of doing business and failure to comply could result in the imposition of fines
or penalties and the termination of contracts. We are subject to a variety of laws and regulations including without limitation;
import and export requirements, anti-bribery and corruption laws, tax laws (including U.S. taxes on foreign subsidiaries),
product compliance laws, environmental laws, foreign exchange controls and cash repatriation restrictions, advertising
regulations, data privacy and cyber security requirements, regulations on suppliers regarding the sources of supplies or
products, labor and employment laws, and anti-competition regulations. In addition, as a supplier to federal, state, and local
government agencies, we must comply with certain laws and regulations relating specifically to the formation, administration,
and performance of our governmental contracts. We are also subject to governmental audits and inquiries in the normal course
of business. Ongoing audit activity and changes to the legal and regulatory environments could increase the cost of doing
business, and such costs may increase in the future as a result of changes in these laws and regulations or in their interpretation.
While we have implemented policies and procedures designed to facilitate compliance with these laws and regulations, there
can be no assurance that our employees, contractors, or agents will not violate such laws and regulations, or our policies. Any
such violations could result in the imposition of fines and penalties, damage to our reputation, and, in the case of laws and
regulations relating specifically to governmental contracts, the loss of those contracts.
We may not be successful in integrating acquisitions and achieving intended benefits and synergies. We have completed
several acquisitions of businesses in recent years. 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, 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,
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 in 2015 and 2016. We have significant exposure to companies involved in the manufacture of
capital goods and heavy equipment. In 2015, our business was impacted by lower commodity prices, including oil, lower
corporate capital spending, and a strong U.S. dollar. These variables resulted in our manufacturing customers making less
money, and when that happens they tend to cut back on spending which yields a slowdown in our business to those
customers. These same dynamics carried into 2016.
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
11
regulations, domestic government regulations, political unrest, war, disruption or delays in shipments, changes in local
economic conditions, or trade issues. Additionally, the shipment of goods from foreign countries could be delayed by container
shipping companies encountering financial or other difficulties. Our operating results and inventory levels could suffer if we
are unable to promptly replace a supplier or shipper who is unwilling or unable to satisfy our requirements with another
supplier or shipper providing equally appealing products and services.
New trade policies could make sourcing product from overseas more difficult and/or more costly. We source a significant
amount of the products we sell from outside of the United States, primarily Asia. This sourcing is both direct (through our
wholly-owned, Asia-based subsidiary, FASTCO Trading Co., Ltd.) and indirect (from vendors that themselves procure product
from international sources). Considerable political uncertainty has arisen in the United States that may result in changes in the
trade policies that companies, such as Fastenal, have built their sourcing operations around. Should this occur, it may be
difficult in light of: (1) the significant structural investments made over time, and (2) the absence of significant domestic
fastener production for us to adjust our capabilities to the new policies in the short term, which could increase the difficulty
and/or cost of sourcing foreign products. Such changes could adversely affect our ability to secure sufficient product to service
our customers and/or adversely affect our cost of operating in a way that hurts our financial results.
Changes in energy costs and the cost of raw materials used in our products could impact our net sales, cost of sales, gross
profit percentage, 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
to deteriorate, or by negatively impacting customers in certain industries, which could cause our sales to those customers to
decline.
The industrial, construction, and maintenance supply industry is consolidating, which could cause it to become more
competitive and could negatively impact our market share, gross profit, and operating income. 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.
Inclement weather and other disruptions to the transportation network could adversely impact our distribution system and
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 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.
Our current estimates of the market potential of our business strategies could be incorrect. Our strategies to grow our
business include the opening of stores in new and existing markets and the expansion of our industrial vending business and
Onsite locations. We currently estimate there is potential market opportunity in North America to support approximately 3,500
stores and that the potential market opportunity for industrial vending is approximately 1.7 million machines. We have also
identified over 15,000 customer locations with the potential to implement our Onsite service model. These estimates are based
on our business model today, and the introduction or expansion of other business strategies, such as on-line retailing, could
cause them to change. In addition, the market potential of a particular business strategy may vary from expectations because of
a change in the marketplace (such as changes in customer concentration or needs), a change in the nature of that business
strategy, or weaker than anticipated acceptance by customers of that business strategy. We cannot guarantee that our market
potential estimates are accurate or that we will decide to open stores or expand our industrial vending or Onsite service models
to reach the full market opportunity. In particular, while we estimate we have the potential in North America for approximately
12
1,000 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.
We are exposed to foreign currency exchange rate risk, and changes in foreign exchange rates could increase our costs to
procure products and impact 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 adversely
impact our ability to procure products overseas at competitive prices and our foreign sales. Historically, our primary exchange
rate exposure has been with the Canadian dollar.
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, 2016, we had $390 million of outstanding debt obligations, including loans outstanding
under our revolving credit facility (the 'Credit Facility') of $305 million and senior unsecured promissory notes issued under
our master note agreement (the 'Master Note Agreement') in the aggregate principal amount of $75 million. Loans under the
Credit Facility bear interest at a rate per annum based on the London Interbank Offered Rate ('LIBOR') and mature on March 1,
2018. The notes issued under our Master Note Agreement consist of two series. The first is in an aggregate principal amount of
$40 million, bears interest at a fixed rate of 2.00% per annum, and is due and payable on July 20, 2021. The second is in an
aggregate principal amount of $35 million, bears interest at a fixed rate of 2.45% per annum, and is due and payable on July 20,
2022. Our aggregate borrowing capacity under the Credit Facility is $700 million. Our aggregate borrowing capacity under the
Master Note Agreement is $200 million; however none of the institutional investors party to that agreement are committed to
purchase notes thereunder.
During periods of volatility and disruption in the United States credit markets, financing may become more costly and more
difficult to obtain. Although the credit market turmoil of 2008 and 2009 did not have a significant adverse impact on our
liquidity or borrowing costs given our low level of indebtedness at that time, the availability of funds tightened and credit
spreads on corporate debt increased. Our indebtedness has increased significantly since 2009 and we have the capacity under
our Credit Facility and Master Note Agreement to substantially increase borrowings in the future. If credit market volatility
were to return, the cost of servicing our existing debt could increase due to the LIBOR-based interest rate provided for under
our Credit Facility. In addition, borrowing additional amounts to finance stock purchases, dividends, capital expenditures, and
other liquidity needs or to refinance our existing indebtedness could be difficult and the cost of doing so could be high.
For more information relating to borrowing and interest rates, see the following sections below: Cash Flow Impact Items –
Liquidity and Capital Resources – Debt 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 Risks', 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 purchased shares in 2016, 2015, and 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.
13
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Note – Information in this section is as of December 31, 2016, unless otherwise noted.
We own the following facilities in Winona, Minnesota:
Purpose
Distribution center and home office
Manufacturing facility
Computer support center
Winona store
Winona product support facility
Rack and shelving storage
Multi-building complex which houses certain operations of the distribution group,
the support services group, and the home office support group
Supplemental warehouse, office, and potential store space, which is subject to a pre-
existing retail lease
(1) Total number of tote locations for small parts storage included in facilities with an ASRS.
We own the following facilities, excluding selling locations, outside of Winona, Minnesota:
Tote Locations
(ASRS)(1)
Approximate
Square Feet
246,000
259,000
100,000
13,000
15,000
55,000
42,000
30,000
100,000
Purpose
Distribution center
Manufacturing facility
Distribution center
Distribution center
Distribution center
Distribution center
Distribution center
Distribution center
Distribution center
Distribution center and manufacturing facility
Manufacturing facility
Local re-distribution center and manufacturing facility
Manufacturing facility
Location
Indianapolis, Indiana
Indianapolis, Indiana
Atlanta, Georgia
Dallas, Texas
Scranton, Pennsylvania
Akron, Ohio
Kansas City, Kansas
Kitchener, Ontario, Canada
High Point, North Carolina
Modesto, California
Rockford, Illinois
Johor, Malaysia
Wallingford, Connecticut
Tote Locations
(ASRS)(1)
561,000 (2)
Approximate
Square Feet
1,039,000
77,000
41,000 (3)
104,000
103,000
128,000
132,000
69,000
220,000
198,000
176,000
189,000
182,000
300,000
142,000
301,000
328,000
100,000
27,000
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 561,000 tote locations for small
parts noted above; 105,000 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.
In addition, we own 179 buildings that house our store locations in various cities throughout North America.
14
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
Distribution center
Distribution center
Distribution center and packaging facility
Distribution center
Location
Seattle, Washington
Salt Lake City, Utah
Salt Lake City, Utah
Approximate
Square Feet
Lease Expiration
Date
100,000
April 2017
74,000
26,000
July 2017
July 2017
Apodaca, Nuevo Leon, Mexico
46,000 March 2020
Distribution center and manufacturing facility Edmonton, Alberta, Canada
Manufacturing facility
Houston, Texas
45,000
21,000
July 2020
July 2019
Remaining
Lease
Renewal
Options
Two
One
One
Three
None
None
Local re-distribution center and
manufacturing facility
Modrice, Czech Republic
15,000
April 2022
None
If economic conditions are suitable in the future, we will 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 there is sufficient
space suitable for our needs and available for leasing.
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.
15
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 20, 2017, there were
approximately 1,100 record holders of our common stock, which includes nominees or broker dealers holding stock on behalf
of an estimated 205,000 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 2016 and 2015.
2016
First quarter
Second quarter
Third quarter
Fourth quarter
High
49.87
$
$
48.93
45.36
49.17
Low
2015
36.53 First quarter
42.70 Second quarter
39.92 Third quarter
38.16 Fourth quarter
High
Low
$
47.40
$
39.82
43.41
42.82
41.64
40.01
36.13
35.50
(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:
First quarter
Second quarter
Third quarter
Fourth quarter
Total
2016
2015
$
$
0.30
0.30
0.30
0.30
1.20
$
$
0.28
0.28
0.28
0.28
1.12
On January 17, 2017, we announced a quarterly dividend of $0.32 per share to be paid on February 28, 2017 to shareholders of
record at the close of business on February 1, 2017. 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 2016:
Period
October 1-31, 2016
November 1-30, 2016
December 1-31, 2016
Total
(a)
(b)
(c)
(d)
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)
0
0
0
0
$0.00
$0.00
$0.00
$0.00
0
0
0
0
1,300,000
1,300,000
1,300,000
1,300,000
(1) On May 1, 2015, our board of directors authorized the purchase by us of 4,000,000 shares of our common stock. As of
December 31, 2016, we had remaining authority to purchase 1,300,000 shares under this authorization.
Purchases of shares of our common stock throughout 2016 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'.
16
Fastenal Company Common Stock Comparative Performance Graph
Set forth below is a graph comparing, for the five years ended December 31, 2016, 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, 2011 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
Fastenal Company
S&P 500 Index
Dow Jones US Industrial Suppliers Index
2011
$ 100.00
100.00
100.00
2012
110.07
116.00
109.05
2013
113.98
153.57
126.24
2014
116.67
174.60
126.17
2015
102.88
177.01
102.85
2016
121.93
198.18
126.35
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 2016 Annual Report to
Shareholders of which this Form 10-K forms a part, a portion of which is filed as Exhibit 13 to this annual report on
Form 10-K.
17
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 2,500 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-centric organization focused on identifying 'drivers' that will allow us to get closer to our customers and gain
market share in what we believe remains a fragmented industrial distribution market. Our current growth drivers will be
discussed throughout this report. Our growth drivers have evolved, and can be expected to continue to evolve, over time.
However, what has always been true, and what we expect to remain true, is the key to the success of any of our growth drivers
is our employees and the services they provide to our customers in the field.
The table below summarizes our store employee count and our total employee count at the end of the periods presented. Later
in this document we discuss the average full-time equivalent ('FTE') headcount to help explain the expense trends in more
detail. The final three items below summarize our investments in industrial vending machines, Onsite locations, and store
locations.
End of period total store employee count
Change in total store employee count
End of period total employee count
Change in total employee count
Industrial vending machines (installed device count)
Number of active Onsite locations
Number of store locations
Q4
2015
Q4
2016
Twelve-month
% Change
13,961
20,746
55,510
264
2,622
12,966
(995)
19,624
(1,122)
62,822 (1)
401
2,503
-7.1%
-5.4%
13.2%
51.9%
-4.5%
(1) In February 2016, we signed an agreement to lease a significant number of industrial vending lockers to one of our
customers. As of December 31, 2016, we have deployed approximately 15,000 devices under this agreement. These devices
do not generate product revenue and are excluded from the count noted above.
Several items worth noting with respect to our results:
(1) During the last twelve months, we have reduced our headcount by 995 people in our stores and 1,122 people in total.
These reductions can be primarily attributed to natural attrition rather than an active headcount reduction program. We
continue to add headcount where necessary to support our growth initiatives, notably our Onsite business (defined as
dedicated sales and service provided from within the customer's facility). However, the continued softness of the
North American industrial economy has caused us to more intensively scrutinize our full- and part-time staffing levels
outside of these initiatives. Indeed, after increasing our total headcount every quarter during 2015, it has declined
during every quarter of 2016. Our current staffing levels approximate those at the end of 2014.
(2) We opened 40 and 41 stores in 2016 and 2015, respectively. Our store network forms the foundation of our business
strategy, and we will continue to open stores in 2017 as is deemed necessary to sustain and improve our network and
support our growth drivers.
(3) We closed or consolidated 144 stores in 2016; about 90% of these stores were in close proximity to another Fastenal
store, and about 85% had leases expiring within 18 months. We closed or consolidated 50 stores in 2015; about 80%
of these stores were in close proximity to another Fastenal store, and about 90% had leases expiring within 18 months.
The store closings did not have a meaningful impact on sales in either period. We intend to continue evaluating
markets for closures and consolidations in 2017 as part of our ongoing efforts to optimize our store network.
18
(4) We continue to see a very strong pace of national account signings (defined as new customer accounts with a multi-site
contract). In 2016 and 2015, we signed 190 and 167 new contracts, respectively. Beyond signings (or growth
activities), we look at the health of our large customer market, and by extension our overall market, by watching the
trends of our top 100 customers (which represented approximately 26% of our sales in 2016). For several years
beginning in 2011, the typical ratio of growth versus contraction in the sales of our top 100 customers was 3:1 (75
grew and 25 contracted). That performance has weakened in recent periods, more typically approximating 1:1 since
the fourth quarter of 2015, including the fourth quarter of 2016 when 51 customers grew (33 with growth of 10% or
more) and 49 customers contracted (31 with contraction of 10% or more).
(5) We have continued to expand our Onsite business. Our goal was to sign 200 Onsite customer locations in 2016, and we
signed 176; 130 were operational as of December 31, 2016. All of the 80 Onsite customer locations we signed in 2015
were operational by the end of the second quarter of 2016.
(6) We have converted most of our United States stores, approximately 2,000, to the CSP 16 (Customer Service Project
2016) format as of December 31, 2016. This merchandising footprint involves expanded inventory placement at our
store locations to enhance same-day capabilities. At the end of the fourth quarter of 2016, our inventory of CSP 16
items at our stores was $42 million higher than the level at the end of the fourth quarter of 2015 (including inventory
at our distribution centers, this value was $46 million higher). From the end of the third quarter of 2015, before we
began this initiative, to the end of the fourth quarter of 2016, our inventory of CSP 16 items at our stores increased by
$50 million (or $54 million when including inventory at our distribution centers).
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 (35% to 40% of our business) and a non-fastener distributor (60% to 65% of our business). Within the non-fastener
component, approximately 25% is distributed through a vending machine.
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 customers value the capabilities we bring to the table, in the last two years this group of customers has seen its growth
prospects weaken. In fact, the daily sales growth of the fastener product line peaked at over 10% in the second half of 2014.
The rate of growth decelerated in the first quarter of 2015, began contracting in the third quarter of 2015, and continued to
experience contraction throughout 2016, including contraction of 2.4% in the fourth quarter.
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 recent years with our added capabilities in industrial vending, where we believe
we have a structural advantage given our local customer service. 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, growth in our non-fastener business has
generally weakened in the last two years. In fact, the daily sales growth of the non-fastener product line peaked at over 17% in
the second half of 2014 before beginning to decelerate in the first quarter of 2015. Daily sales of non-fasteners did not contract
as fasteners did, but did slow to a growth rate of just 1.2% in the fourth quarter of 2015. Daily sales of non-fasteners rebounded
in 2016, growing about 5% in each of the first three quarters of the year, with 5.9% growth in the fourth quarter of 2016.
One particular non-fastener product line, safety supplies, has benefited significantly from our initiatives with industrial
vending. We introduced the safety supplies product line in 1999 and, at 15.3% of total sales in the fourth quarter of 2016, it
represents our second largest product line after fasteners. Daily sales of our safety supplies product line experienced growth of
19
about 27% in the last six months of 2014, declined to about 6% growth in the fourth quarter of 2015 and improved to 9.3%
annual growth in 2016.
Please read through the detailed Sales and Sales Trends section later in this document for additional insight.
Our gross profit decreased from 49.9% in the fourth quarter of 2015, and increased from 49.3% in the third quarter of 2016, to
49.8% in the fourth quarter of 2016. 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). Larger customers produce a below-company
average gross profit; however, they generally leverage our existing network of capabilities which typically allows us to enjoy
strong incremental operating income growth. This customer mix change (large versus small), as well as our product mix change
(from fasteners to non-fasteners), over time places sustained pressure on our gross profit. We continued to face these headwinds
throughout 2016 as the daily sales to our national accounts customers and of our non-fastener products grew approximately two
percentage points and three percentage points faster, respectively, than total company sales growth. Against this backdrop, we
believe we did well to hold the gross profit in the fourth quarter of 2016 relatively stable versus the fourth quarter of 2015. The
meaningful sequential increase in our gross profit in the fourth quarter of 2016 relative to the third quarter of 2016 is not
attributable to any single item. Rather, it reflects modest positive contributions from a handful of sources, including favorable
product mix, lower freight costs, increased sales of Fastenal brands (private label), and the absence of certain costs related to
growth initiatives (e.g., costs related to setting up CSP 16) in previous quarters.
Our operating income decreased from 19.4% in the fourth quarter of 2015 and from 20.0% in the third quarter of 2016, to
19.3% in the fourth quarter of 2016. For the year, our operating and administrative expenses in 2016 have increased primarily
as a result of the following: (1) an increase in industrial vending equipment, (2) an increase in average FTE headcount, (3) an
increase in health care costs, (4) an increase in information systems costs, and (5) an increase in the number of vehicles for
sales personnel. These increases were partially offset by a contraction in our performance bonuses and commissions, in our
profit sharing contribution, and in fuel expense. Our fourth quarter 2016 operating income was relatively stable with the fourth
quarter 2015 level as an increase in occupancy expenses as a percentage of sales (expansion of our vending devices) was
mostly offset by a decline in payroll expenses as a percentage of sales (reduced headcount). The sequential decline in our
operating income in the fourth quarter of 2016 relative to the third quarter of 2016 is consistent with historical norms and
related to the lower sales volume that is typical of the period.
Using a quarterly average, the FTE headcount grew as follows for the periods ended December 31 (compared to the same
period in the preceding year):
Store based average FTE headcount
Total average FTE headcount
Note – Full-time equivalent is based on 40 hours per week.
Twelve-month period
Three-month period
2016
2015
2016
2015
3.4%
4.6%
5.4%
5.3%
-3.7%
-1.8%
10.2%
9.0%
Our signings and installed device count of vending machines were as follows for each period:
Device count signed during the period
Q1
Q2
Q3
Q4
Annual
2016
2015
4,647
3,962
4,869
5,144
4,783
4,689
3,760
4,016
18,059
17,811
Device count installed at the end of the period 2016
2015
56,889
48,545
58,346
50,620
60,400
53,547
62,822
55,510
In 2016 we executed a strategy of optimizing our vending machines, evaluating our devices for utilization, throughput, and
product mix. By improving the efficiency of our installed base, we were able to remove about 9,300 units from service, which
has the effect of artificially depressing our net installs in 2016 (a similar, less formal, effort existed in 2015, resulting in the
removal of about 7,700 units). These removed units form a pool of ready-to-deploy machines that should reduce the capital
necessary in the short term to continue growing our industrial vending device count. While this discrete initiative is
substantially complete, efforts to incrementally optimize our growing installed base will be continuous.
20
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 $140 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 or the customer's facility; therefore, our focus centers on understanding our
customers' day, their opportunities, and their obstacles.
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:
Net sales
Percentage change
Business days
Daily sales
Percentage change
Impact of currency fluctuations (primarily Canada)
Impact of acquisitions
$
$
2016
3,962,036
2015
3,869,187
2014
3,733,507
2.4%
255
15,537
2.0%
-0.4%
0.6%
3.6%
254
15,233
3.2%
-1.2%
0.2%
12.2%
253
14,757
12.7%
-0.5%
0.2%
The increase in net sales in 2016, 2015, and 2014 came primarily from higher unit sales. The higher unit sales resulted
primarily from increases in sales at existing store locations and to a lesser degree the opening of new store locations in the last
several years. The growth in net sales at the older store locations was due to the growth drivers of our business (discussed
throughout this document). Net sales were also 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. 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. The rates of growth in net sales in
2016 and 2015 were 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 an effort to generate
more selling energy within our stores, and a stabilization in our OEM fastener business.
21
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: 2016 group – opened 2006 and earlier, 2015 group – opened 2005 and earlier, and 2014 group –
opened 2004 and earlier) and opened greater than five years ago (store sites opened as follows: 2016 group – opened 2011 and
earlier, 2015 group – opened 2010 and earlier, and 2014 group – opened 2009 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: 2016 group – opened 2014 and earlier,
2015 group – opened 2013 and earlier, and 2014 group – opened 2012 and earlier). The daily sales change for each of these
groups was as follows:
Store Age
Opened greater than 10 years
Opened greater than 5 years
Opened greater than 2 years
2016
0.5%
0.6%
0.9%
2015
2.7%
2.5%
2.5%
2014
10.5%
10.9%
11.5%
Note: The age groups above are measured as of the last day of each respective year.
Stores opened in 2016 contributed approximately $14,900 (or 0.4%) to 2016 net sales. Stores opened in 2015 contributed
approximately $36,619 (or 0.9%) to 2016 net sales and approximately $8,745 (or 0.2%) to 2015 net sales. The rate of sales
growth at store locations generally levels off after they have been open for five years, and the sales generated at our older store
locations typically vary more with the economy than do the sales growth rates of younger stores.
SALES BY PRODUCT LINE
The approximate mix of sales from the fastener product line and from the other product lines was as follows:
Fastener product line
Other product lines
2016
37%
63%
2015
38%
62%
2014
40%
60%
The decrease in our fastener sales as a percentage of total sales arises from two factors. First, we believe non-fastener products
represent a larger market opportunity than fasteners, and that we are relatively under-represented in this market. Over time, this
has led to faster growth in the non-fastener product lines, a trend amplified by the growth of our industrial vending program
through which we sell primarily non-fastener products. We believe this factor will continue to promote a lower mix of fasteners
in our total sales over time. Second, a weak industrial production environment, such as was experienced in 2015 and 2016, has
a disproportionately negative effect on fastener sales relative to non-fastener sales (which relates more to plant operations than
production). This weakness is more cyclical than secular, and it is possible that a better economic environment could at least
partially mitigate the first factor discussed.
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):
2016
2015
2014
Jan.
3.3%
12.0%
6.7%
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
3.2%
3.9%
0.3%
2.1%
2.6%
1.6% -0.3% -0.8% -1.1% -3.8%
8.6%
3.2%
7.7% 11.6% 10.0% 13.5% 12.7% 14.7% 15.0% 12.9% 14.6% 15.3% 17.4%
3.8%
6.1%
0.0%
5.6%
0.0%
3.7%
1.1%
5.3%
1.2%
2.8%
22
Stores opened greater than two years – Our stores opened greater than two years (store sites opened as follows: 2016 group –
opened 2014 and earlier, 2015 group – opened 2013 and earlier, and 2014 group – opened 2012 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):
2016
2015
2014
Jan.
2.2%
11.2%
5.5%
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
1.4% -1.4%
4.8%
7.8%
6.5% 10.2%
2.5% -0.2% -1.2%
2.9%
2.7%
1.0% -0.9% -1.1% -2.1% -5.0%
3.2%
4.6%
5.4%
8.4% 12.1% 11.4% 13.4% 14.0% 11.8% 13.5% 14.0% 16.5%
0.9% -0.7%
2.6%
0.7%
1.6%
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: 2016 group – opened 2011 and earlier, 2015 group –
opened 2010 and earlier, and 2014 group – opened 2009 and earlier). This group, which represented about 90% of our total
sales in 2016, 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):
2016
2015
2014
Jan.
1.7%
10.8%
4.6%
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
1.3% -1.7%
4.8%
7.2%
9.5%
5.4%
2.1% -0.4% -1.8%
2.7%
2.1%
1.3% -1.1% -1.0% -1.8% -5.3%
5.6%
3.1%
4.6%
7.7% 11.5% 10.8% 12.9% 13.4% 11.7% 13.3% 13.6% 16.2%
0.5% -0.7%
3.1%
0.3%
1.1%
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 relative to the United States dollar impacted our net sales growth over the last
several years. During 2016, it lowered our net sales growth by 0.4%. During the years 2015 and 2014, it lowered our net sales
growth by 1.2% and 0.5% respectively.
In the first quarter of 2014, our sales growth was hampered by a weak economy, foreign exchange rate fluctuations (primarily
related to the Canadian dollar), and a severe winter in North America that impacted our customers and our trucking network.
This was partly offset by favorable holiday timing in March. The headwinds from the economy and foreign exchange rates
persisted in the second quarter of 2014 and the favorable holiday timing in March reversed in April, but the weather effects
faded. By May and June results were significantly less 'noisy' and sales to customers engaged in heavy machinery
manufacturing, which represents approximately one-fifth of our business, improved.
During 2015, our business weakened. This 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. November and especially December experienced a greater frequency and duration of customer plant shutdowns than
is typical of these holiday-affected periods.
During 2016, business activity remained generally weak, but stable, throughout the year. In the first quarter of 2016, we
returned to growth with a 3.5% increase in net sales over the first quarter of 2015 as the impact of seasonal plant shutdowns in
the fourth quarter of 2015 subsided. The period did include some 'noise' related to changing business day counts. For instance
there was an extra day in February and March which tends to 'understate' the daily sales growth percentage, and one fewer day
in January which tends to 'overstate' the daily sales growth percentage. There was also one extra business day in the period and
the Easter holiday shifted into March. Overall, during the first quarter of 2016, daily sales grew 1.9%. There was 'noise'
throughout the second quarter of 2016 as well (one more day in May, one fewer day and the absence of Easter in April), but
daily sales growth nonetheless came in at 1.6%. Business conditions looked similar in the third quarter of 2016, with daily sales
growth of 1.8%. The fourth quarter of 2016 did show some improvement with daily sales growth of 2.7%, though this more
likely reflected an easier comparison than substantive improvement in overall demand. For most of the year, we saw relative
weakness from non-residential construction and heavy manufacturing customers and in demand for our fastener products,
speaking to the sustained softness in heavy and general industrial markets. Business with our largest customers was also
relatively weak, with sales to our top 100 customers rising modestly in the first half of 2016 and falling modestly in the second
half of 2016. While these weaknesses were representative of conditions in the United States and Canada, total sales outside of
these geographic areas were relatively strong and improved over the course of 2016.
23
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 March
2016, in April 2015, and in April 2014), 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 of the latter).
The tables below show the pattern to the sequential change in our daily sales. The line in the first table 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 serves 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 representative. The '2016',
'2015', and '2014' lines represent our actual sequential daily sales changes. The '16Delta', '15Delta', and '14Delta' lines indicate
the difference between the 'Benchmark' and the actual results in the respective year.
Benchmark
2016
16Delta
2015
15Delta
2014
14Delta
Jan.(1)
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
0.8% 2.2% 3.8% 0.4% 3.1% 2.7% -2.1% 2.5% 3.7% -1.2%
0.4% -0.8% 1.5% 1.7% 0.6% -0.2% -2.3% 2.4% 1.5% -0.9%
-0.4% -3.0% -2.3% 1.3% -2.5% -2.9% -0.2% -0.1% -2.2% 0.3%
-3.6% -0.1% 4.2% -2.1% 3.4% 0.9% -4.3% 4.1% -0.9% -2.0%
-4.4% -2.3% 0.4% -2.5% 0.3% -1.8% -2.2% 1.6% -4.6% -0.8%
-1.4% 3.0% 7.1% -2.6% 4.2% 2.5% -3.8% 5.8% 1.0% -1.5%
-2.2% 0.8% 3.3% -3.0% 1.1% -0.2% -1.7% 3.3% -2.7% -0.3%
Cumulative
Change from
Jan. to Oct.
15.9%
3.6%
-12.3%
2.9%
-13.0%
16.2%
0.3%
In 2017, we will begin to utilize a more recent time frame (a trailing five year average) as our 'New Benchmark'. Our business
has changed meaningfully over time, and we believe a benchmark that places greater emphasis on more recent patterns is likely
to better reflect potential conditions in the future. For the sake of comparison, we have included in this second table a
comparison of 2014, 2015, and 2016 to the new benchmark (2011-2015).
New Benchmark
2016
16Delta
2015
15Delta
2014
14Delta
July
Feb.
Apr.
June
May
Mar.
Aug.
Jan.(1)
-1.2% 1.4% 5.6% -1.1% 2.7% 2.2% -3.5% 3.6% 2.2% -2.1%
0.4% -0.8% 1.5% 1.7% 0.6% -0.2% -2.3% 2.4% 1.5% -0.9%
1.6% -2.2% -4.1% 2.8% -2.1% -2.4% 1.2% -1.2% -0.7% 1.2%
-3.6% -0.1% 4.2% -2.1% 3.4% 0.9% -4.3% 4.1% -0.9% -2.0%
-2.4% -1.5% -1.4% -1.0% 0.7% -1.3% -0.8% 0.5% -3.1% 0.1%
-1.4% 3.0% 7.1% -2.6% 4.2% 2.5% -3.8% 5.8% 1.0% -1.5%
-0.2% 1.6% 1.5% -1.5% 1.5% 0.3% -0.3% 2.2% -1.2% 0.6%
Sept.
Oct.
Cumulative
Change from
Jan. to Oct.
11.2%
3.6%
-7.6%
2.9%
-8.3%
16.2%
5.0%
(1) The January figures represent the percentage change from the previous October, whereas the remaining figures represent the
percentage change from the previous month.
24
A graph of the sequential daily sales change patterns discussed above, including the 'New Benchmark' period of 2011 - 2015,
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, a significant subset of which finds its way into the heavy equipment and oil and gas markets. The
daily sales growth rates to these customers, when compared to the same period in the prior year, were as follows:
2016
2015
2014
Q1
0.9%
6.9%
9.0%
Q2
0.7%
3.8%
11.2%
Q3
1.0%
1.1%
13.7%
Q4
3.0%
-2.2%
13.8%
Annual
1.4%
2.3%
12.0%
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 (35% to 40% of our business) which is heavily influenced by changes in our business with heavy equipment
manufacturers. From a company perspective, daily sales growth rates of fasteners, when compared to the same period in the
prior year, were as follows (note: this information includes all end markets):
2016
2015
2014
Q1
-1.7%
5.5%
1.6%
Q2
-2.4%
0.0%
5.5%
Q3
-2.9%
-4.4%
9.9%
Q4
-2.4%
-6.2%
11.4%
Annual
-2.3%
-1.4%
6.9%
25
By contrast, the best way to understand the change in the maintenance portion of the manufacturing business is to examine the
results in our non-fastener product lines. From a company perspective, daily sales growth rates of non-fasteners, when
compared to the same period in the prior year, were as follows (note: this information includes all end markets):
2016
2015
2014
Q1
4.7%
11.7%
14.2%
Q2
4.7%
9.0%
17.1%
Q3
4.9%
5.9%
17.6%
Q4
5.9%
1.2%
19.0%
Annual
5.0%
6.8%
17.2%
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 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:
2016
2015
2014
Q1
-0.4%
6.2%
2.9%
Q2
-1.7%
1.6%
7.5%
Q3
-1.9%
-1.7%
9.3%
Q4
-1.6%
-6.1%
12.6%
Annual
-1.2%
-0.2%
7.8%
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 beginning in the second quarter of 2015 and
throughout 2016.
A graph of the sequential daily sales trends to these two end markets in 2016, 2015, and 2014, starting with a base of '100' in
the previous October and ending with the next October, would be as follows:
Manufacturing
26
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 41 stores in 2015, at an annual rate of approximately 2%, and 40 stores in 2016, at an
annual rate of approximately 2%. Our store network forms the foundation of our business strategy, and we will continue to
open stores in 2017 as is deemed necessary to sustain and improve our network and support our growth drivers.
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 continued 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. Since 2014, we have continued to evaluate opportunities for store closings.
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. We will continue to evaluate opportunities for store closings/consolidations in the future.
27
The following table provides a summary of store closings for each of the last three years and the corresponding analysis period
used to measure their profitability.
Total number of store locations closed
Number of profitable store locations closed
Analysis measurement period for closures
2016
2015
2014
144
95
50
35
73
29
Q4 2015
Q3 2014
Q1 2014
There is a short-term cost 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 cost
primarily relates to the future commitments at our 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.
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. 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 nearly 65% 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 selling 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
fourteen years ago and our 'Master Stocking Hub' initiative approximately nine 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).
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 85% 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 and 2016, we continued to enhance the technology in our automated distribution
centers, to sharpen our focus on growing our Onsite business, and to expand 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 of 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 is an important chapter in the Fastenal story; we also believe it will continue to be transformative to
industrial distribution, and that we have a 'first mover' advantage. Given this, we have continued investing aggressively to
maximize the advantage.
28
Our expanded industrial vending portfolio consists of 23 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 the target monthly revenue ranges from under $1,000 per device 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).
The industrial vending information related to contracts signed during each period was as follows:
Device count signed during the period
'Machine equivalent' count signed during the period
2016
2015
2014
2016
2015
2014
Q1
4,647
3,962
4,025
3,696
2,916
2,974
Q2
4,869
5,144
4,137
3,941
3,931
3,179
Q3
4,783
4,689
4,072
3,520
3,769
3,189
The industrial vending information related to installed machines at the end of each period was as follows:
Device count installed at the end of the period
'Machine equivalent' count installed at the end of the
period
Q1
56,889
48,545
42,153
43,329
35,997
30,326
Q2
58,346
50,620
43,761
44,707
37,714
31,713
Q3
60,400
53,547
45,596
46,399
40,067
33,296
2016
2015
2014
2016
2015
2014
Annual
18,059
17,811
16,342
14,108
13,935
12,585
Q4
3,760
4,016
4,108
2,951
3,319
3,243
Q4
62,822
55,510
46,855
48,399
41,905
34,529
Note: In February 2016, we signed an agreement to lease a significant number of industrial vending lockers to one of our
customers. As of December 31, 2016, September 30, 2016, and June 30, 2016, we have deployed approximately 15,000,
11,000, and 3,000 devices, respectively, under this agreement. These devices do not generate product revenue and are excluded
from the counts noted above.
The following table includes some additional statistics regarding our net sales and daily sales growth:
Percent of total net sales to customers with
industrial vending(1)
Daily sales growth to customers with
industrial vending(2)
2016
2015
2014
2016
2015
2014
Q1
44.5%
40.5%
37.8%
3.6%
12.3%
19.7%
Q2
44.6%
40.9%
37.0%
2.7%
8.6%
20.9%
Q3
45.0%
42.1%
37.8%
2.4%
4.8%
21.9%
Q4
46.1%
43.9%
39.3%
3.7%
0.7%
20.0%
(1) The percentage of total net sales (vended and traditional) to customers currently using a vending solution.
(2) The growth in total net sales (vended and traditional) to customers currently using a vending solution compared to the same
period in the preceding year.
A significant number of our customers utilize a Fastenal vending machine. Indeed, the percent of net sales to customers with
industrial vending, at 46.1% in the fourth quarter of 2016, is approaching half of our sales base. Customers utilizing vending
have continued to grow faster than our overall business: in the first, second, third, and fourth quarters of 2016, daily sales to
these customers grew 3.6%, 2.7%, 2.4%, and 3.7%, respectively. However, the relative growth of these customers has
moderated over the last couple of years as customers taking advantage of the service have grown to be an increasingly
significant portion of our total customer base. Put another way, penetration of our customer base with vending solutions has
risen to the point where macroeconomic variables that affect the customer increasingly affect machine throughput as well. We
believe our installed base of machines and our penetration of our customer base will continue to grow and be a catalyst to
29
gaining an increasing share of our customer’s MRO spending. This was evident in 2016: our installed machine base increased
13.2% and the daily sales growth of product moving through those machines similarly increased at a rate greater than 10%.
Daily sales of our safety product line, which is heavily vended, increased 9.3% in 2016. We believe these factors point to our
gaining increasing wallet share with our customers through vending.
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 higher frequency 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).
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. Cash flow is what funds our growth, provides us with short-term and long-term flexibility, and enables us to create value
for our customers, our employees, our suppliers, and our shareholders. 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 both by improving
our gross profit and by structurally lowering our operating and administrative expenses.
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 expense as a percentage of net
sales generally improves. The operating and administrative expense improvement starts on day one, while the gross profit
percentage decline typically occurs when the average sales at a store move above $100 thousand per month. Fortunately, the
operating and administrative 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, excluding leased locker
equipment), 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, cost of sales, is directly related to sales and fluctuations in sales. However, it is also heavily influenced by
product and customer mix. As is true for the company as a whole, many stores are under-represented by, and seeing superior
growth from, the non-fastener product category and/or the large customer category. As these tend to contribute
disproportionately to a store's growth and increase in scale, we often see a decline in gross profit as the average monthly net
sales of a store increase. Over the long-term and in the absence of offsetting efforts elsewhere in the business (which we
address below), we expect these factors to continue to exert pressure on our gross profit percentage.
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'.
30
STATEMENT OF EARNINGS INFORMATION (percentage of net sales) for the periods ended December 31:
Net sales
Gross profit
Operating and administrative expenses
Gain on sale of property and equipment
Operating income
Net interest income (expense)
Earnings before income taxes
Note – Amounts may not foot due to rounding difference.
Gross profit – The gross profit percentage during each period was as follows:
2016
2015
2014
Twelve-month Period
2016
100.0%
49.6%
29.5%
0.0%
20.1%
-0.2%
19.9%
2015
100.0%
50.4%
29.0%
0.0%
21.4%
-0.1%
21.3%
2014
100.0%
50.8%
29.8%
0.0%
21.1%
0.0%
21.1%
Q3
Q2
Q1
49.8% 49.5% 49.3% 49.8%
50.8 % 50.3 % 50.5 % 49.9 %
51.2 % 50.8 % 50.8 % 50.5 %
Q4
Important factors that impact our gross profit percentage over the long-term are our mix of store sizes, customer sizes,
products, geographic locations, end markets, and end market uses (such as industrial production business versus maintenance
business). 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, which is currently our largest single
product line at 35% to 40% of sales, is our highest gross profit product line given the high transaction cost surrounding the
sourcing and supply of the product for our customers. Any reduction in the mix of our sales attributable to fasteners, and
particularly maintenance fasteners, may negatively impact gross profit. Larger customers, whose more focused buying patterns
allow us to offer them better pricing, also influence gross profit. Stores typically achieve higher average sales
disproportionately by growth in the non-fastener product lines and with large customers, causing gross profit to decline as
average net sales grow. One 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 seasonal reduction in non-residential construction business. This drop off in sales reduces the utilization of our trucking
network which can also slightly reduce our gross profit.
Besides the long-term trends noted above, periods of inflation or deflation and sudden changes in business volume can cause
short-term fluctuations in our gross profit percentage by effecting product and customer mix, freight, and sourcing strength that
can occur as we leverage buying scale and efficiency. Sudden changes in business volume can also impact our gross profit
percentage over the short-term by influencing supplier volume allowances. Our gross profit percentage is also 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.
During 2016, our gross profit, as a percentage of net sales, decreased when compared to 2015. This decrease was primarily
caused by changes in product and customer mix. Our gross profit also decreased in the fourth quarter of 2016 when compared
to the fourth quarter of 2015 for similar reasons.The sequential increase in our gross profit in the fourth quarter of 2016 relative
to the third quarter of 2016 is a reflection of modest positive contributions from several sources, including favorable product
mix, lower freight costs, increased sales of Fastenal brands, and the absence of certain costs related to our growth initiatives
(e.g., costs related to setting up CSP 16) in previous quarters.
During 2015, our gross profit, as a percentage of net sales, decreased when compared to 2014. This decrease was primarily
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 was primarily driven by changes in product and customer mix and
our strong emphasis on growing average store sales.
31
Operating and administrative expenses - These expenses increased as a percentage of net sales from 2015 to 2016.
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 (contracted) as follows for the periods ended
December 31 (compared to the same periods in the preceding year):
Employee related expenses
Occupancy related expenses
Selling transportation costs
Twelve-month Period
2016
2015
2.7%
0.7%
10.1%
7.4%
2.9% -13.1%
2014
11.7%
6.9%
10.1%
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 increase in 2016, when compared to 2015, was caused by
increases in full-time equivalent headcount (see table below) and an increase in health care costs. These increases were partially
offset by a contraction in our performance bonuses and commissions, and in our profit sharing contribution, primarily due to
lower sales growth, gross profit, and operating income (both on a dollar basis and on a relative basis). The slight increase in
2015, when compared to 2014, was caused by increases in full-time equivalent headcount 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.
Using a monthly average, the FTE headcount grew (contracted) as follows (compared to the same period in the preceding
years):
Store and Onsite based
Total selling (includes store and Onsite)
Distribution
Manufacturing
Administrative
Total average FTE headcount
Twelve-month Period
2016
2015
2014
2.4%
3.7%
6.4%
-6.4%
6.3%
3.8%
6.2%
6.1%
6.1%
0.1%
6.7%
5.9%
12.5%
12.3%
11.5%
10.7%
8.9%
11.9%
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, excluding leased
locker equipment, to be a logical extension of our store operation and classify the depreciation, repair costs, and hosting
services as occupancy expense). The increase in 2016, when compared to 2015, was mainly driven by (1) an increase in the
amount of industrial vending equipment discussed earlier in this document, and (2) an increase in occupancy expense related to
rent. The largest impact came from the industrial vending equipment. 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. In 2016 and
2015, the industrial vending component represented approximately 66% and 42%, 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 increased in 2016, when compared to
2015. This was driven by an increase in the number of vehicles for sales personnel, and was partially offset by a decrease in
fuel expense. The contraction in selling transportation costs included in operating and administrative expenses in 2015, when
compared to 2014, was driven by the decline in fuel costs.
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 2016, our total vehicle fuel costs were approximately $6.4 million, $8.2 million, $8.3 million, and $8.0 million,
respectively. 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. The fluctuations were a result of: (1) variations in fuel costs,
(2) the service levels provided to our stores from our distribution centers, (3) the number of vehicles at our store locations, (4)
the number of other sales centered vehicles as a result of store openings and the expansion of our non-store sales force, and (5)
32
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 36.8%, 37.5%, and 37.2%
for 2016, 2015, and 2014, respectively. The decrease in our income tax rate from 2015 to 2016 was caused by a slight change in
jurisdictional income and changes in the reserve for uncertain tax positions. 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. 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
Net earnings
Basic EPS
Diluted EPS
Percentage Change
Net earnings
Basic EPS
Diluted EPS
2016
$ 499,478
2015
2014
516,361
494,150
1.73
1.73
1.77
1.77
1.67
1.66
2016
2015
2014
-3.3%
-2.3%
-2.3%
4.5%
6.0%
6.6%
10.1%
10.6%
9.9%
During 2016, net earnings decreased, despite our nominal sales growth, primarily due to the reduction in the gross profit
percent realized and an increase in operating and administrative expenses (discussed earlier in this document). The contraction
of basic and diluted earnings per share was smaller due primarily to the purchase of our shares of common stock in 2015 and
early 2016. 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.
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
Accounts receivable, net
Inventories
Operational working capital
Annual percentage change
Accounts receivable, net
Inventories
Operational working capital
$
2016
31,341
79,726
$ 111,067
2015
6,298
44,039
50,337
2016
2015
6.7%
8.7%
8.0%
1.4%
5.1%
3.8%
In 2016, the annual growth in net accounts receivables outpaced the growth in sales. This was not the case through the third
quarter, and was mostly a function of conditions in the fourth quarter of 2016. In the fourth quarter of 2015, we collected
receivables from our seasonally stronger third quarter, but because demand fell off surprisingly sharply in November and
December, our fourth quarter receivables were unseasonably low. In the fourth quarter of 2016, by contrast, we collected
receivables from our seasonally stronger third quarter, but because demand was more closely in line with seasonal norms, our
receivables in the period were similarly more normal. Over a longer period of time, investors should be aware that if we
continue to see relatively strong growth in our international business and of our large customer accounts it could create
difficulty in managing the growth of accounts receivables relative to the growth in net sales.
Our growth in inventory balances over time does not have as direct a relationship to our monthly sales patterns as does our
growth in accounts receivable. This is impacted by other aspects of our business. For example, the dramatic economic
slowdown in late 2008 and early 2009 caused our inventory to spike. This occurred because the lead time for inventory
33
procurement is typically longer than the visibility we have into future monthly sales patterns. Over the last decade, we
increased our relative inventory levels due to the following: (1) new store openings, (2) expanded stocking breadth at
distribution centers (for example, our master stocking hub in Indianapolis expanded its product breadth over six fold from 2005
to 2011), (3) expanded direct sourcing, (4) expanded Fastenal brands, (5) expanded industrial vending solutions, (6) national
accounts and Onsite growth, (7) international growth, and (8) expanded stocking breadth at individual stores related to our CSP
initiatives. All of these items impacted both 2016 and 2015. However, throughout 2016, the most significant contributors to the
increase in inventories were the impact of infusing incremental inventory into our network beginning at the end of 2015 as part
of our CSP 16 initiative, the relative growth of international sales, the growth of our Onsite business, and opportunist product
purchases at year-end. Absent the opportunistic product purchases at year-end, growth in inventories would have moderated
substantially from earlier in the year, reflecting the stabilizing of CSP 16 inventories.
The approximate percentage mix of inventory stocked at our selling locations versus our distribution center and manufacturing
locations was as follows at year end:
Selling locations
Distribution center and manufacturing locations
Total
2016
2015
2014
64%
36%
100%
61%
39%
100%
56%
44%
100%
New stores open with the standard store model (CSP 16), which consists of a core stocking level of approximately $60
thousand per location. This inventory level grows as the level of business in a store grows. In the fourth quarter of 2015, we
began expanding the inventory offering at our existing store locations to the CSP 16 format. This inventory expansion
continued throughout 2016.
As we indicated in earlier communications, our goal is to target a ratio of annual sales to accounts receivable and inventory
(Annual Sales: AR&I) of approximately a 3.0:1 ratio. On December 31, 2016 and 2015, we had a ratio of 2.7:1 and 2.8:1,
respectively.
Liquidity and Capital Resources:
Net cash provided by operating activities — Net cash provided by operating activities in dollars and as a percentage of net
earnings were as follows:
Net cash provided
% of net earnings
2016
$ 513,999
2015
546,940
2014
499,392
102.9%
105.9%
101.1%
In 2016, the slight contraction in the net cash provided by operating activities was driven by our current initiative to add
additional products into store inventory under our CSP 16 format, and an increase in net accounts receivable growth. This
decrease was partially offset by a reduction in net cash paid for income taxes. In 2015, the increase in the net cash provided by
operating activities was driven by growth in net earnings, and a decrease in the cash required to fund our net working capital,
which includes accounts receivable and inventory changes. This was partially offset by an increase in cash paid for income
taxes.
Net cash used in investing activities — Net cash used in investing activities in dollars and as a percentage of net earnings
were as follows:
Net cash used
% of net earnings
2016
$ 188,093
2015
180,627
2014
188,781
37.7%
35.0%
38.2%
The changes in net cash used in investing activities were primarily related to changes in our net capital expenditures as
discussed below and cash paid for acquisitions in 2015 and 2014.
34
Net capital expenditures (purchases of property and equipment, less proceeds from the sale of property and equipment) in
dollars and as a percentage of net earnings were as follows:
Net capital expenditures
% of net earnings
2016
$ 182,946
2015
145,227
2014
183,655
36.6%
28.1%
37.2%
Note: A reconciliation of net capital expenditures is outlined in the table below.
Our net capital expenditures increased in 2016. This was primarily due to the purchase of industrial vending machines related
to the leased locker program we signed in February 2016 and spending on automation in certain distribution centers. Our net
capital expenditures decreased in 2015, which was largely related to the completion of distribution automation projects in
process during 2014.
Property and equipment expenditures in 2016, 2015, and 2014 consisted of: (1) the purchase of software and hardware for our
information processing systems, (2) the addition of certain pick-up trucks, (3) the purchase of signage, shelving, and other fixed
assets related to store openings and our CSP initiative, (4) the addition of manufacturing and warehouse equipment, (5) the
expansion or improvement of certain owned or leased store properties, (6) the expansion of our distribution/trucking fleet,
(7) purchases related to industrial vending, which primarily consists of automated vending equipment and construction of a
new centralized distribution facility (2014), and (8) costs related to enhancements to distribution centers with existing
automation (2016, 2015, and 2014), and the expansion of our distribution centers in High Point, North Carolina (2016 and
2015), Modesto, California (2014), Scranton, Pennsylvania (2014), and Kitchener, Ontario, Canada (2014). Disposals of
property and equipment consisted of the planned disposition of certain pick-up trucks, distribution vehicles and trailers in the
normal course of business, and the disposition of real estate relating to several store locations (2016, 2015, and 2014) and a
distribution center (2015).
Set forth below is an estimate of our 2017 net capital expenditures and a recap of our 2016, 2015, and 2014 net capital
expenditures.
Manufacturing, warehouse and packaging equipment,
industrial vending equipment, and facilities
Shelving and related supplies for store openings and for
product expansion at existing stores
Data processing software and equipment
Real estate and improvements to store locations
Vehicles
Purchases of property and equipment
Proceeds from sale of property and equipment
Net Capital Expenditures
2017
(Estimate)
2016
(Actual)
2015
(Actual)
2014
(Actual)
$
67,000
131,793
112,460
144,649
13,000
21,000
7,000
17,000
125,000
(6,000)
119,000
$
14,079
18,015
5,467
20,097
189,451
(6,505)
182,946
8,958
19,653
4,247
9,850
155,168
(9,941)
145,227
6,712
23,978
4,091
10,044
189,474
(5,819)
183,655
We anticipate funding our capital expenditure needs with cash generated from operations, from available cash and cash
equivalents, and from our borrowing capacity.
Net cash used in financing activities – Net cash used in financing activities in dollars and as a percentage of net earnings were
as follows:
Net cash used
% of net earnings
2016
$ 340,872
2015
337,563
2014
249,732
68.2%
65.4%
50.5%
35
The fluctuations in net cash used in financing activities are due to changes in the level of our dividend payments and in the
level of common stock purchases. These amounts were partially offset by the exercise of stock options and the related tax
impact, and net borrowings under debt obligations. These items in dollars and as a percentage of earnings were as follows:
Dividends paid
% of net earnings
Common stock purchases
% of net earnings
Total returned to shareholders
% of net earnings
Proceeds from the exercise of stock options and
the related excess tax benefits from stock-based compensation
% of net earnings
Cash borrowings, net
% of net earnings
Net cash used
% of net earnings
2016
$ 346,588
2015
327,101
2014
296,581
69.4%
63.3%
60.0%
59,440
292,951
11.9%
56.7%
52,942
10.7%
$ 406,028
620,052
349,523
81.3%
120.1%
70.7%
$
(35,156)
-7.0%
$
(30,000)
-6.0%
(22,489)
-4.4%
(260,000)
-50.4%
(9,791)
-2.0%
(90,000)
-18.2%
$ 340,872
337,563
249,732
68.2%
65.4%
50.5%
Unremitted Foreign Earnings – Approximately $70,995 of cash and cash equivalents are held by non-U.S. subsidiaries.
These funds may create foreign currency translation gains or losses depending on the functional currency of the entity holding
the cash. We intend to utilize these funds to support our expansion activities outside the U.S. The income tax impact of
repatriating cash associated with certain undistributed earnings is discussed in Note 6 of the Notes to Consolidated Financial
Statements.
Stock Purchases — During 2016, we purchased 1,600,000 shares of our common stock at an average price of approximately
$37.15 per share. During 2015, we purchased 7,100,000 shares of our common stock at an average price of approximately
$41.26 per share. During 2014, we purchased 1,200,000 shares of our common stock at an average price of approximately
$44.12 per share.
Dividends — We declared a quarterly dividend of $0.32 per share on January 17, 2017. We paid aggregate annual dividends
per share of $1.20, $1.12, and $1.00 in 2016, 2015, and 2014, respectively.
Debt — In order to fund the considerable cash needed to purchase industrial vending machines under our leased locker
program, to expand our industrial vending business, to increase the use of automation in our distribution centers, and to
purchase our common stock and pay dividends, we have borrowed increased amounts under our Credit Facility and our Master
Note Agreement in recent periods.
Our borrowings under the Credit Facility peaked during each quarter of 2016 and 2015 as follows:
Peak borrowings
First quarter
Second quarter
Third quarter
Fourth quarter
$
2016
440,000
485,000
460,000
405,000
2015
185,000
400,000
395,000
390,000
As of December 31, 2016, we had loans outstanding under the Credit Facility of $305,000 and contingent obligations from
letters of credit outstanding under the Credit Facility in an aggregate face amount of $36,267. As of December 31, 2016, we
also had loans outstanding under the Master Note Agreement of $75,000. Descriptions of our Credit Facility and Master Note
Agreement are contained in Note 9 of the Notes to Consolidated Financial Statements.
Effects of Inflation — During the first half of 2016, we experienced some deflation in our fastener products, which was largely
offset by some inflation in the latter half of the year, and minimal price movements in our non-fastener products. In 2015 and
36
2014, we experienced some deflation in our fastener products and minimal price movements in our non-fastener products, with
the net impact being a slight drag on growth.
Critical Accounting Policies – Our accounting policies related to certain assets and liabilities are an integral part of our
consolidated financial statements. These policies are considered critical because they require application of assumptions and
judgments based on historical trends and the composition of account balances. Although we believe our reserves are adequate,
the results could be materially different if our assumptions and historical trends do not reflect actual results.
Allowance for doubtful accounts – This reserve is for accounts receivable balances that are potentially uncollectible. The
reserve is based on an analysis of customer accounts and our historical experience with accounts receivable write-offs. Our
methodology for estimating this reserve includes ongoing reviews of the aging of accounts receivable, the financial condition of
a customer or industry, and general economic conditions. If business or economic conditions change, our estimates and
assumptions may be adjusted as deemed appropriate. For fiscal years 2016, 2015, and 2014, actual results did not vary
materially from estimated amounts.
Inventory reserves – The reserves are for potentially obsolete or excess inventory and shrinkage. The reserves are based on an
analysis of inventory trends. The analysis includes reviews of inventory levels, sales information, physical inventory counts,
cycle count adjustments, and the on-hand quantities relative to the sales history for the product. Our methodology for estimating
these reserves is continually evaluated for factors that could require changes to the reserves including significant changes in
product demand, market conditions, condition of the inventory, or liquidation value. If business or economic conditions change,
our estimates and assumptions may be adjusted as deemed appropriate. For fiscal years 2016, 2015, and 2014, actual results did
not vary materially from estimated amounts.
Insurance reserves – These reserves are for general claims related to workers' compensation, property and casualty losses,
health claims, and other self-insured losses. The reserves are based on an analysis of external data related to our historical claim
trends. We perform ongoing reviews of our insured and uninsured risks and use this information to establish appropriate reserve
levels. We analyze historical trends, claims experience, and loss development patterns to ensure the appropriate loss
development factors are applied to the incurred costs associated with the claims made. For fiscal years 2016, 2015, and 2014,
actual results did not vary materially from estimated amounts.
New Accounting Pronouncements
A description of new accounting pronouncements is contained in Note 12 of the Notes to Consolidated Financial Statements.
Geographic Information
Information regarding our revenues and long-lived assets by geographic area is contained in Note 7 of the Notes to
Consolidated Financial Statements. Risks related to our foreign operations are described earlier in this Form 10-K under the
heading 'Forward-Looking Statements' and 'Item 1A. Risk Factors'.
Certain Contractual Obligations
As of December 31, 2016, we had outstanding long-term debt and facilities, equipment, and vehicles leased under operating
leases. Our future obligations to pay principal of and interest on such long-term debt and to make minimum lease payments
under such operating leases are as follows:
Principal of long-term debt
Interest on long-term debt(1)
Operating leases
Total
Total
2017
2018 and 2019
2020 and 2021
After 2021
$
390,000
15,745
321,382
$
727,127
10,482
7,676
129,445
147,603
304,518
4,311
148,785
457,614
40,000
3,115
41,766
84,881
35,000
643
1,386
37,029
(1) Interest on the long-term debt outstanding under our Credit Facility was calculated using the interest rates and balances at
December 31, 2016.
Purchase orders and contracts for the purchase of inventory and other goods and services are not included in the table above.
Our purchase orders are based on current distribution needs and are fulfilled by our vendors within short time horizons. We do
not have significant agreements for the purchase of inventory or other goods or services specifying minimum order quantities.
Liabilities for uncertain tax positions have been excluded from the table above due to the uncertainty surrounding the ultimate
settlement and timing of these liabilities. A discussion of income taxes is contained in Note 6 of the Notes to Consolidated
Financial Statements.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to certain market risks from changes in foreign currency exchange rates, commodity steel pricing, commodity
energy prices, and interest rates. Changes in these factors cause fluctuations in our earnings and cash flows. We evaluate and
manage exposure to these market risks as follows:
Foreign currency exchange rates – Foreign currency fluctuations can affect our net investments and earnings denominated in
foreign currencies. Historically, our primary exchange rate exposure has been with the Canadian dollar against the United
States dollar. Our estimated net earnings exposure for foreign currency exchange rates was not material at year end.
Commodity steel pricing – We buy and sell various types of steel products; these products consist primarily of different types
of threaded fasteners. During the first half of 2016, we experienced some deflation in steel prices. This deflation was largely
offset by some inflation in the latter half of the year. In 2015 and 2014, we noted some overall deflation in steel pricing. We are
exposed to the impacts of commodity steel pricing and our related ability to pass through the impacts to our end customers.
Commodity energy prices – We have market risk for changes in prices of gasoline, diesel fuel, natural gas, and electricity;
however, this risk is mitigated in part by our ability to pass freight costs to our customers, the efficiency of our trucking
distribution network, and the ability, over time, to manage our occupancy costs related to the heating and cooling of our
facilities through better efficiency.
Interest rates - Loans under our Credit Facility bear interest at floating rates tied to LIBOR. As a result, changes in LIBOR can
affect our operating results and liquidity to the extent we do not have effective interest rate swap arrangements in place. We
have not historically used interest rate swap arrangements to hedge the variable interest rates under our Credit Facility. A 1%
increase in LIBOR in 2016 would have resulted in approximately $3.9 million of additional interest expense. A description of
our Credit Facility is contained in Note 9 of the Notes to Consolidated Financial Statements.
38
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Fastenal Company:
We have audited the accompanying consolidated balance sheets of Fastenal Company and subsidiaries as of December 31,
2016 and 2015, and the related consolidated statements of earnings, comprehensive income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2016. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule listed in the table of contents at Item 15. We also
have audited the Company's internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Fastenal Company's management is responsible for these consolidated financial statements and the
financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and
the financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Fastenal Company and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Also in our opinion, Fastenal Company and subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013)
issued by COSO.
/s/ KPMG LLP
Minneapolis, Minnesota
February 6, 2017
39
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands except share information)
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable, net of allowance for doubtful accounts of $11,249 and
$11,729, respectively
Inventories
Prepaid income taxes
Other current assets
Total current assets
Property and equipment, net
Other assets, net
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of debt
Accounts payable
Accrued expenses
Total current liabilities
Long-term debt
Deferred income tax liabilities
Commitments and contingencies (Notes 4, 8, and 9)
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized; no shares issued or
outstanding
Common stock, $0.01 par value, 400,000,000 shares authorized; 289,161,924 and
289,581,682 shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
December 31
2016
2015
$
112,735
129,019
499,716
992,989
12,907
102,423
468,375
913,263
22,558
131,561
1,720,770
1,664,776
899,697
48,417
818,889
48,797
$
2,668,884
2,532,462
$
10,482
108,740
156,422
275,644
379,518
80,628
62,050
125,973
185,143
373,166
302,950
55,057
—
2,892
37,363
1,940,143
(47,304)
1,933,094
—
2,896
2,024
1,842,772
(46,403)
1,801,289
Total liabilities and stockholders’ equity
$
2,668,884
2,532,462
See accompanying Notes to Consolidated Financial Statements.
40
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
(Amounts in thousands except earnings per share)
For the year ended December 31
Net sales
Cost of sales
Gross profit
Operating and administrative expenses
Gain on sale of property and equipment
Operating income
Interest income
Interest expense
2016
2015
2014
$
3,962,036
3,869,187
3,733,507
1,997,259
1,964,777
1,169,470
(532)
795,839
394
(6,504)
1,920,253
1,948,934
1,121,590
(1,411)
828,755
373
(3,108)
1,836,105
1,897,402
1,110,776
(964)
787,590
759
(915)
Earnings before income taxes
789,729
826,020
787,434
Income tax expense
Net earnings
Basic net earnings per share
Diluted net earnings per share
290,251
309,659
293,284
499,478
516,361
494,150
1.73
1.73
1.77
1.77
1.67
1.66
$
$
$
Basic weighted average shares outstanding
288,950
291,453
296,490
Diluted weighted average shares outstanding
289,158
292,045
297,313
See accompanying Notes to Consolidated Financial Statements.
41
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
For the year ended December 31
Net earnings
Other comprehensive income (loss), net of tax:
2016
499,478
$
2015
2014
516,361
494,150
Foreign currency translation adjustments (net of tax of $0 in 2016, 2015,
and 2014)
Change in marketable securities (net of tax of $0 in 2016, 2015, and 2014)
Comprehensive income
(901)
—
$
498,577
(38,567)
—
477,794
(18,683)
(254)
475,213
See accompanying Notes to Consolidated Financial Statements.
42
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Amounts in thousands)
Balance as of December 31, 2013
Dividends paid in cash
Purchases of common stock
Stock options exercised
Stock-based compensation
Excess tax benefits from stock-based
compensation
Net earnings
Other comprehensive income (loss)
Common Stock
Shares
Amount
296,753
$
2,968
—
(1,200)
315
—
—
—
—
—
(12)
3
—
—
—
—
Balance as of December 31, 2014
295,868
$
2,959
Dividends paid in cash
Purchases of common stock
Stock options exercised
Stock-based compensation
Excess tax benefits from stock-based
compensation
Net earnings
Other comprehensive income (loss)
Balance as of December 31, 2015
Dividends paid in cash
Purchases of common stock
Stock options exercised
Stock-based compensation
Excess tax benefits from stock-based
compensation
Net earnings
Other comprehensive income (loss)
Balance as of December 31, 2016
—
(7,100)
814
—
—
—
—
$
289,582
—
(1,600)
1,180
—
—
—
—
289,162
$
—
(71)
8
—
—
—
—
2,896
—
(16)
12
—
—
—
—
2,892
Additional
Paid-in
Capital
69,847
—
(52,930)
7,694
7,039
2,094
—
—
33,744
—
(60,042)
19,091
5,841
3,390
—
—
2,024
—
(3,905)
29,260
4,100
5,884
—
—
37,363
Retained
Earnings
1,688,781
(296,581)
—
—
—
—
494,150
—
1,886,350
(327,101)
(232,838)
—
—
—
516,361
—
1,842,772
(346,588)
(55,519)
—
—
—
Accumulated
Other
Comprehensive
Income (Loss)
11,101
—
—
—
—
—
—
(18,937)
(7,836)
—
—
—
—
—
—
(38,567)
(46,403)
—
—
—
—
—
Total
Stockholders'
Equity
1,772,697
(296,581)
(52,942)
7,697
7,039
2,094
494,150
(18,937)
1,915,217
(327,101)
(292,951)
19,099
5,841
3,390
516,361
(38,567)
1,801,289
(346,588)
(59,440)
29,272
4,100
5,884
499,478
—
1,940,143
—
(901)
(47,304)
499,478
(901)
1,933,094
See accompanying Notes to Consolidated Financial Statements.
43
FASTENAL COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
For the year ended December 31
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by
operating activities, net of acquisitions:
Depreciation of property and equipment
Gain on sale of property and equipment
Bad debt expense
Deferred income taxes
Stock-based compensation
Excess tax benefits from stock-based compensation
Amortization of non-compete agreements
Changes in operating assets and liabilities, net of acquisitions:
Trade accounts receivable
Inventories
Other current assets
Accounts payable
Accrued expenses
Income taxes
Other
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Cash paid for acquisitions
Proceeds from sale of property and equipment
Net decrease in marketable securities
Other
Net cash used in investing activities
Cash flows from financing activities:
Borrowings under debt obligations
Payments against debt obligations
Proceeds from exercise of stock options
Excess tax benefits from stock-based compensation
Purchases of common stock
Payments of dividends
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid for interest
Net cash paid for income taxes
2016
2015
2014
$
499,478
516,361
494,150
103,525
(532)
8,550
25,571
4,100
(5,884)
527
(40,490)
(80,853)
29,138
(17,233)
(28,721)
15,535
1,288
513,999
(189,451)
—
6,505
—
(5,147)
(188,093)
950,000
(920,000)
29,272
5,884
(59,440)
(346,588)
(340,872)
(1,318)
(16,284)
129,019
112,735
86,071
(1,411)
8,769
8,290
5,841
(3,390)
527
(20,608)
(47,830)
(15,778)
20,617
11,141
(26,610)
4,950
546,940
(155,168)
(23,493)
9,941
—
(11,907)
(180,627)
1,215,000
(955,000)
19,099
3,390
(292,951)
(327,101)
(337,563)
(14,227)
14,523
114,496
129,019
72,145
(964)
11,480
1,760
7,039
(2,094)
527
(63,418)
(87,622)
(7,510)
12,501
25,263
34,405
1,730
499,392
(189,474)
(5,575)
5,819
451
(2)
(188,781)
705,000
(615,000)
7,697
2,094
(52,942)
(296,581)
(249,732)
(4,889)
55,990
58,506
114,496
6,183
248,329
3,103
327,034
915
257,514
$
$
$
See accompanying Notes to Consolidated Financial Statements.
44
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Business Overview and Summary of Significant Accounting Policies
Business Overview
Fastenal is a leader in the wholesale distribution of industrial and construction supplies operating a store-based business with
approximately 2,500 locations. These locations are primarily in North America.
Principles of Consolidation
The consolidated financial statements include the accounts of Fastenal Company and its subsidiaries (collectively referred to as
'Fastenal' or by terms such as 'we', 'our', or 'us'). All material intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition and Accounts Receivable
Net sales include products, services, shipping and handling charges, and lease fees billed, net of any related sales incentives,
and net of an estimate for product returns. We recognize revenue when persuasive evidence of an arrangement exists, title and
risk of ownership have passed, the sales price is fixed or determinable, and collectibility is reasonably assured. These criteria
are met at the time the product is shipped to or picked up by the customer. We recognize services at the time the service is
completed and product is provided to the customer. We recognize revenue for shipping and handling charges at the time the
products are shipped to or picked up by the customer. We recognize revenue for lease fees on a straight-line basis over the
corresponding lease term. We estimate product returns based on historical return rates. Accounts receivable are stated at their
estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts and our
historical experience with accounts receivable write-offs. Sales taxes (and value added taxes in foreign jurisdictions) collected
from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net
sales.
Foreign Currency Translation and Transactions
The functional currency of our foreign operations is typically the applicable local currency. The functional currency is
translated into United States dollars for balance sheet accounts, except retained earnings, using current exchange rates as of the
balance sheet date, for retained earnings at historical exchange rates, and for revenue and expense accounts using a weighted
average exchange rate during the period. The translation adjustments are deferred as a separate component of stockholders'
equity captioned accumulated other comprehensive income (loss). Gains or losses resulting from transactions denominated in
foreign currencies are included in cost of sales or operating and administrative expenses.
Cash and Cash Equivalents
We consider all investments purchased with original maturities of three months or less to be cash equivalents.
Financial Instruments and Marketable Securities
All financial instruments are carried at amounts that approximate fair value. The fair value is the price at which an asset could
be exchanged in a current transaction between knowledgeable, willing parties. Assets measured at fair value are categorized
based upon the lowest level of significant input to the valuations. Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or
inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. Level 3 inputs are
unobservable inputs based upon our own assumptions used to measure assets and liabilities at fair value. In determining fair
value we use observable market data when available.
Due to the varying short-term cash needs of our business, we periodically have available-for-sale marketable securities. We did
not have any marketable securities as of December 31, 2016 or December 31, 2015. Available-for-sale securities are recorded at
fair value based on current market value. Unrealized holding gains and losses on available-for-sale securities are excluded from
earnings but are included in accumulated other comprehensive income (loss) as a separate component of stockholders' equity
until realized. If a decline in the market value of any available-for-sale security is below cost and is deemed other than
temporary, it is charged to net earnings resulting in the establishment of a new cost basis for the security.
45
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Inventories
Inventories, consisting of finished goods merchandise held for resale, are stated at the lower of cost (first in, first out method) or
market.
Property and Equipment
Property and equipment are stated at cost. Depreciation on property and equipment is provided for using the straight-line
method over the anticipated economic useful lives of the related property. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash
flows expected to be generated by the asset or asset group to its carrying value. If the carrying value of the long-lived asset or
asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent the carrying value
exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models,
quoted market values, and third-party independent appraisals, as considered necessary. There were no impairments recorded
during any of the three years reported in these consolidated financial statements.
Leases
We lease space under operating leases for certain distribution centers, stores, and manufacturing locations. These leases do not
have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Any such
terms are recognized as rent expense over the term of the lease. Further, the leases do not contain contingent rent provisions.
Leasehold improvements on operating leases are amortized over their estimated service lives on a straight-line basis, or the
remaining lease term, whichever is shorter. We lease certain semi-tractors, pick-ups, and equipment under operating leases.
Other Long-Lived Assets
Other assets consist of prepaid deposits, goodwill, non-compete agreements, and other related intangible assets. Goodwill
represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is reviewed for impairment
annually. The non-compete and related intangible assets are amortized on a straight-line basis over their estimated life.
Accounting Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles
(GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and
expenses, and the disclosure of contingent liabilities. Actual results could differ from those estimates.
Insurance Reserves
We are self-insured for certain losses relating to medical, dental, workers' compensation, and other casualty losses. Specific stop
loss coverage is provided for catastrophic claims in order to limit exposure to significant claims. Losses and claims are charged
to operations when it is probable a loss has been incurred and the amount can be reasonably estimated. Accrued insurance
liabilities are based on claims filed but unpaid and estimates of claims incurred but not reported.
Product Warranties
We offer a basic limited warranty for certain of our products. The specific terms and conditions of those warranties vary
depending upon the product sold. We typically recoup these costs through product warranties we hold with the original
equipment manufacturers. Our warranty expense has historically been minimal.
Stock-Based Compensation
We estimate the value of stock option grants using a Black-Scholes valuation model. Stock-based compensation expense is
recognized on a straight-line basis over the vesting period. Our stock-based compensation expense is recorded in operating and
administrative expenses.
We report the benefits of tax deductions in excess of recognized stock-based compensation as cash flows from financing
activities, thereby reducing net cash flows from operating activities and increasing net cash flows from financing activities.
46
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized
income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties
related to unrecognized tax benefits in income tax expense.
Earnings Per Share
Basic net earnings per share is calculated using net earnings available to common stockholders divided by the weighted average
number of shares of common stock outstanding during the year. Diluted net earnings per share is similar to basic net earnings
per share except that the weighted average number of shares of common stock outstanding includes the incremental shares
assumed to be issued upon the exercise of stock options considered to be 'in-the-money' (i.e. when the market price of our stock
is greater than the exercise price of our outstanding stock options).
Segment Reporting
We have determined that for our North American operations we meet the aggregation criteria outlined in the accounting
standards as our various operations have similar (1) economic characteristics, (2) products and services, (3) customers,
(4) distribution channels, and (5) regulatory environments. Considering the insignificance of our operations outside of North
America, we report as a single business segment.
Note 2. Long-Lived Assets
Property and equipment
Property and equipment at year end consisted of the following:
Land
Buildings and improvements
Automated distribution and warehouse equipment
Shelving, industrial vending, and equipment
Transportation equipment
Construction in progress
Less accumulated depreciation
Property and equipment, net
Depreciable Life
in Years
2016
2015
— $
37,339
15 to 40
5 to 30
3 to 10
3 to 5
—
297,093
216,276
723,854
71,750
152,523
37,671
271,302
204,708
548,921
61,429
200,892
1,498,835
(599,138)
899,697
$
1,324,923
(506,034)
818,889
47
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Note 3. Accrued Expenses
Accrued expenses at year end consisted of the following:
Payroll and related taxes
Bonuses and commissions
Profit sharing contribution
Insurance reserves
Promotions
Indirect taxes
Deferred revenue
Legal reserves
Other
Accrued expenses
Note 4. Stockholders' Equity
Dividends
2016
2015
$
23,180
14,156
8,665
34,640
24,853
43,443
2,767
1,393
3,325
24,407
15,441
13,669
31,821
25,261
66,563
2,875
1,930
3,176
$
156,422
185,143
On January 17, 2017, our board of directors declared a quarterly dividend of $0.32 per share of common stock to be paid in
cash on February 28, 2017 to shareholders of record at the close of business on February 1, 2017. We paid aggregate annual
dividends per share of $1.20, $1.12, and $1.00 in 2016, 2015, and 2014, respectively.
Stock Options
Effective January 3, 2017, the compensation committee of our board of directors granted to our employees options to purchase
a total of 764,789 shares of our common stock at an exercise strike price of $47.00 per share. The closing stock price on the
effective date of the grant was $46.95 per share.
The following tables summarize the details of options granted under our stock option plan that were still outstanding as of
December 31, 2016, and the assumptions used to value those grants. All such grants were effective at the close of business on
the date of grant.
Date of Grant
April 19, 2016
April 21, 2015
April 22, 2014
April 16, 2013
April 17, 2012
April 19, 2011
April 20, 2010
April 21, 2009
April 15, 2008
Total
Options
Granted
Option Exercise
(Strike) Price
Closing Stock
Price on Date
of Grant
December 31, 2016
Options
Outstanding
Options
Exercisable
46.00
42.00
56.00
54.00
54.00
35.00
30.00
27.00
27.00
$
$
$
$
$
$
$
$
$
45.74
41.26
50.53
49.25
49.01
31.78
27.13
17.61
24.35
789,363
738,834
608,750
115,000
981,500
83,900
147,300
228,650
64,650
3,757,947
—
—
122,500
3,500
682,250
46,400
94,800
186,150
64,650
1,200,250
845,440
893,220
955,000
205,000
1,235,000
410,000
530,000
790,000
550,000
6,413,660
$
$
$
$
$
$
$
$
$
48
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Risk-free
Interest Rate
Expected Life
of Option in
Years
Expected
Dividend
Yield
Expected
Stock
Volatility
Estimated Fair
Value of Stock
Option
1.3%
1.3%
1.8%
0.7%
0.9%
2.1%
2.6%
1.9%
2.7%
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
2.6%
2.7%
2.0%
1.6%
1.4%
1.6%
1.5%
1.0%
1.0%
26.34% $
26.84% $
28.55% $
37.42% $
39.25% $
39.33% $
39.10% $
38.80% $
30.93% $
8.18
7.35
9.57
12.66
13.69
11.20
8.14
3.64
7.75
Date of Grant
April 19, 2016
April 21, 2015
April 22, 2014
April 16, 2013
April 17, 2012
April 19, 2011
April 20, 2010
April 21, 2009
April 15, 2008
All of the options in the tables above vest and become exercisable over a period of up to eight years. Generally, each option
will terminate approximately nine years after the grant date.
The fair value of each share-based option is estimated on the date of grant using a Black-Scholes valuation method that uses the
assumptions listed above. The risk-free interest rate is based on the U.S. Treasury rate over the expected life of the option at the
time of grant. The expected life is the average length of time over which we expect the employee groups will exercise their
options, which is based on historical experience with similar grants. The dividend yield is estimated over the expected life of
the option based on our current dividend payout, historical dividends paid, and expected future cash dividends. Expected stock
volatilities are based on the movement of our stock price over the most recent historical period equivalent to the expected life
of the option.
A summary of activities under our stock option plan consisted of the following:
Outstanding as of January 1, 2016
Granted
Exercised
Cancelled/forfeited
Outstanding as of December 31, 2016
Exercisable as of December 31, 2016
Outstanding as of January 1, 2015
Granted
Exercised
Cancelled/forfeited
Outstanding as of December 31, 2015
Exercisable as of December 31, 2015
(1) Weighted average exercise price.
(2) Weighted average remaining contractual life in years.
Options
Outstanding
Exercise
Price(1)
Remaining
Life(2)
4,530,982
$
845,440
$
(1,180,242) $
(438,233) $
$
3,757,947
1,200,250
$
41.49
46.00
24.80
49.49
46.81
45.93
4.89
8.41
5.85
3.74
Options
Outstanding
Exercise
Price(1)
Remaining
Life(2)
$
4,712,330
893,220
$
(813,838) $
(260,730) $
$
4,530,982
1,792,242
$
38.52
42.00
23.47
45.84
41.49
31.00
4.59
8.41
4.89
2.15
The total intrinsic value of stock options exercised during the years ended December 31, 2016, 2015, and 2014 was $23,236,
$14,174, and $7,466, respectively. The intrinsic value represents the difference between the exercise price and fair value of the
underlying shares at the date of exercise.
At December 31, 2016, there was $14,455 of total unrecognized stock-based compensation expense related to outstanding
unvested stock options granted under the plan. This expense is expected to be recognized over a weighted average period of
4.56 years. Any future change in estimated forfeitures will impact this amount. The total grant date fair value of stock options
vested under our stock option plan during 2016, 2015, and 2014 was $7,083, $5,143, and $7,287, respectively.
49
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Total stock-based compensation expense related to our stock option plan was $4,100, $5,841, and $7,039 for 2016, 2015, and
2014, respectively.
Earnings Per Share
The following tables present a reconciliation of the denominators used in the computation of basic and diluted earnings per
share and a summary of the options to purchase shares of common stock which were excluded from the diluted earnings
calculation because they were anti-dilutive:
Reconciliation
Basic weighted average shares outstanding
Weighted shares assumed upon exercise of stock options
Diluted weighted average shares outstanding
Summary of Anti-dilutive Options Excluded
Options to purchase shares of common stock
Weighted average exercise prices of options
2016
288,949,525
207,998
289,157,523
2015
291,453,107
592,335
292,045,442
2014
296,490,378
822,866
297,313,244
2016
3,095,343
50.09
$
2015
2,611,367
51.89
2014
1,903,767
54.67
Any dilutive impact summarized above related to periods when the average market price of our stock exceeded the exercise
price of the potentially dilutive stock options then outstanding.
Note 5. Retirement Savings Plan
The Fastenal Company and Subsidiaries 401(k) and Employee Stock Ownership Plan covers all of our employees in the United
States. Our employees in Canada may participate in a Registered Retirement Savings Plan. The general purpose of both of these
plans is to provide additional financial security during retirement by providing employees with an incentive to make regular
savings contributions. In addition to the participation of our employees, we make annual profit sharing contributions based on
an established formula. The expense recorded under this profit sharing formula was approximately $8,665, $13,669, and
$11,460 for 2016, 2015, and 2014, respectively.
Note 6. Income Taxes
Earnings before income taxes were derived from the following sources:
Domestic
Foreign
Earnings before income taxes
Components of income tax expense (benefit) were as follows:
2016:
Federal
State
Foreign
Income tax expense
2015:
Federal
State
Foreign
Income tax expense
50
2016
739,383
50,346
789,729
$
$
2015
2014
785,916
40,104
826,020
757,896
29,538
787,434
Current
Deferred
$
223,837
28,231
12,634
$
264,702
23,149
1,236
1,164
25,549
Total
246,986
29,467
13,798
290,251
Current
Deferred
Total
$
256,748
31,297
13,677
$
301,722
7,362
227
348
7,937
264,110
31,524
14,025
309,659
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
2014:
Federal
State
Foreign
Income tax expense
Current
Deferred
Total
$
250,527
30,768
10,518
$
291,813
1,919
256
(704)
1,471
252,446
31,024
9,814
293,284
Income tax expense in the accompanying consolidated financial statements differed from the expected expense as follows:
Federal income tax expense at the 'expected' rate of 35%
Increase (decrease) attributed to:
State income taxes, net of federal benefit
Other, net
Total income tax expense
Effective income tax rate
2016
$ 276,405
2015
289,107
2014
275,602
20,038
(6,192)
$ 290,251
21,613
(1,061)
309,659
20,549
(2,867)
293,284
36.8%
37.5%
37.2%
The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at year end consisted of the
following:
Deferred income tax assets (liabilities):
Inventory costing and valuation methods
Allowance for doubtful accounts
Insurance reserves
Promotions payable
Stock-based compensation
Federal and state benefit of uncertain tax positions
Foreign net operating loss and credit carryforwards
Foreign valuation allowances
Other, net
Total deferred income tax assets
Property and equipment
Total deferred income tax liabilities
Net deferred income tax liabilities
2016
2015
$
$
4,788
4,339
11,489
1,651
6,789
1,908
5,121
(3,998)
2,123
34,210
(114,838)
(114,838)
(80,628)
4,556
4,529
10,930
1,738
8,270
1,911
5,155
(3,406)
1,541
35,224
(90,281)
(90,281)
(55,057)
A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits was as follows:
Balance at beginning of year:
Increase related to prior year tax positions
Decrease related to prior year tax positions
Increase related to current year tax positions
Decrease related to statute of limitation lapses
Balance at end of year:
2016
2015
$
$
5,417
194
—
846
(1,050)
5,407
3,772
704
(43)
984
—
5,417
Included in the liability for gross unrecognized tax benefits is an immaterial amount for interest and penalties, both of which we
classify as a component of income tax expense. The amount of gross unrecognized tax benefits that would favorably impact the
effective tax rate, if recognized, is not material. We do not anticipate significant changes in total unrecognized tax benefits
during the next twelve months.
51
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Fastenal files income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions.
With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before
2014 in the case of United States federal examinations, and 2012 in the case of foreign, state, and local examinations.
In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate
earnings only when the tax impact is zero or very minimal. As of December 31, 2016, we have not made a provision for United
States income taxes or for additional foreign withholding taxes on $147,000 of unremitted earnings. Such earnings are
considered to be indefinitely reinvested and, accordingly, no U.S. federal or state deferred income taxes have been provided on
this amount or any additional excess of the amount for financial reporting over the tax basis of investments in foreign
subsidiaries. Earnings is the most significant component of the basis difference which is indefinitely reinvested. Generally, such
amounts become subject to United States taxation upon the remittance of dividends and under certain other circumstances. It is
not practicable to estimate the amount of deferred income tax liabilities related to investments in these foreign subsidiaries.
Note 7. Geographic Information
Our revenues and long-lived assets related to the following geographic areas:
Revenues
United States
Canada
Other foreign countries
Total revenues
Long-Lived Assets
United States
Canada
Other foreign countries
Total long-lived assets
2016
$ 3,493,459
2015
2014
3,441,141
3,308,226
228,685
239,892
223,270
204,776
238,590
186,691
$ 3,962,036
3,869,187
3,733,507
$
2016
899,133
33,164
15,817
$
948,114
2015
2014
821,063
32,290
14,333
867,686
725,189
37,580
13,068
775,837
The accounting policies of the operations in the various geographic areas are the same as those described in the summary of
significant accounting policies. Long-lived assets consist of net property and equipment, deposits, goodwill, and other net
intangibles. Revenues are attributed to countries based on the location of the store from which the sale occurred. In each of the
years presented in the table above, no single customer represented 5% or more of our consolidated net sales.
Note 8. Operating Leases
We lease space under non-cancelable operating leases for several distribution centers, several manufacturing locations, and
certain store locations. These leases do not have significant rent escalation holidays, concessions, leasehold improvement
incentives, or other build-out clauses. Any such terms are recognized as rent expense over the term of the lease. Further, the
leases do not contain contingent rent provisions. The net book value of leasehold improvements at December 31, 2016 was
$3,122. We lease certain semi-tractors and pick-ups under operating leases. Future minimum lease payments for all operating
leases are as follows:
2017
2018
2019
2020
2021
2022 and thereafter
Total minimum lease payments
Leased
Facilities and
Equipment
Leased
Vehicles
$
97,456
72,345
47,070
28,571
11,620
1,386
31,989
20,453
8,917
1,575
—
—
Total
129,445
92,798
55,987
30,146
11,620
1,386
$
258,448
62,934
321,382
52
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Rent expense under all operating leases was as follows:
2016
2015
2014
Leased
Facilities and
Equipment
$
$
$
110,123
105,961
103,294
Leased
Vehicles
42,663
38,178
35,731
Total
152,786
144,139
139,025
Certain operating leases for pick-up trucks contain residual value guarantee provisions which would generally become due at
the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value.
The aggregate residual value guarantee related to these leases was approximately $76,808. We believe the likelihood of funding
the guarantee obligation under any provision of the operating lease agreements is remote other than where we have established
an accrual for estimated losses, which was immaterial at December 31, 2016. To the extent our fleet contains vehicles we
estimate will settle at a gain, such gains on these vehicles will be recognized when we sell the vehicle.
Note 9. Debt Commitments and Contingencies
Credit Facility, Notes Payable, and Commitments
Debt obligations and letters of credit outstanding at year end consisted of the following:
Outstanding loans under unsecured revolving Credit Facility
2.00% Senior unsecured promissory note payable
2.45% Senior unsecured promissory note payable
Note payable under asset purchase agreement
Total debt
Less: Current portion of debt
Long-term debt
2016
305,000
40,000
35,000
10,000
390,000
(10,482)
379,518
$
$
2015
350,000
—
—
15,000
365,000
(62,050)
302,950
Outstanding letters of credit under unsecured revolving Credit Facility - contingent obligation $
36,267
36,266
Unsecured Revolving Credit Facility
We have a $700,000 committed unsecured revolving credit facility ('Credit Facility'). The Credit Facility includes a committed
letter of credit subfacility of $55,000. The commitments under the Credit Facility will expire (and any borrowings outstanding
under the Credit Facility will become due and payable) on March 1, 2018. In the next twelve months, we have the ability and
intent to repay a portion of the outstanding loans using cash; therefore, we have classified this portion as a current liability. The
Credit Facility contains certain financial and other covenants, and our right to borrow under the Credit Facility is conditioned
upon, among other things, our compliance with these covenants. We are currently in compliance with these covenants.
Borrowings under the Credit Facility generally bear interest at a rate per annum equal to the London Interbank Offered Rate
('LIBOR') for interest periods of various lengths selected by us, plus 0.95%. Based on the interest periods we have chosen, our
weighted per annum interest rate at December 31, 2016 was approximately 1.7%. We pay a commitment fee for the unused
portion of the Credit Facility. This fee is either 0.10% or 0.125% per annum based on our usage of the Credit Facility.
Senior Unsecured Promissory Notes Payable
On July 20, 2016 (the 'Effective Date'), we entered into a master note agreement (the 'Master Note Agreement') with certain
institutional lenders, pursuant to which, during the period commencing on the Effective Date and ending three years thereafter,
we may issue at our discretion in private placements, and the institutional lenders may purchase at their discretion, senior
unsecured promissory notes of the Company (the 'Notes') in the aggregate principal amount outstanding from time to time of up
to $200,000. The Notes will bear interest at either a fixed rate, or a floating rate based on LIBOR for an interest period of one,
three, or six months. The Notes will mature no later than 12 years after the date of issuance thereof, in the case of fixed rate
Notes, or 10 years after the date of issuance thereof, in the case of floating rate Notes. All of the Notes will be prepayable at our
option in whole or in part. The Master Note Agreement contains certain financial and other covenants. We are currently in
compliance with these covenants.
53
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Two series of unsecured senior Notes are currently outstanding under the Master Note Agreement, each of which was issued on
the Effective Date. The first series of Notes ('Series A') is in an aggregate principal amount of $40,000, is due and payable in
full on July 20, 2021, and bears interest at a fixed rate of 2.00% per annum. The second series of Notes ('Series B') is in an
aggregate principal amount of $35,000, is due and payable in full on July 20, 2022, and bears interest at a fixed rate of 2.45%
per annum. There is no amortization of the Series A and Series B Notes prior to their maturity dates. Interest on such Notes is
payable quarterly in arrears on January 20, April 20, July 20, and October 20 of each year, beginning on October 20, 2016. The
carrying value of our Series A and Series B Notes approximates fair value. The fair value was based on available external
pricing data and current market rates for similar debt instruments, among other factors, which are classified as level 2 inputs
within the fair value hierarchy.
Note Payable Under Asset Purchase Agreement
On December 7, 2015, we signed an agreement to purchase, effective January 2, 2017 ('Asset Purchase Effective Date'), certain
assets related to the collection and management of certain portions of our business and financial data from Apex Industrial
Technologies, LLC ('Apex'), a provider of automated point-of-use dispensing and supply chain technologies. The agreement
includes a transition arrangement which requires us to assume responsibility for certain software that is licensed by Apex. The
total consideration for the assets is $27,000, of which $12,000 was paid in cash in December 2015 in advance of the Asset
Purchase Effective Date. The remaining $15,000 is payable in installments pursuant to an unsecured note. The first $5,000
installment was paid in December 2016, while the two remaining installments of $5,000 each will be paid in June 2017 and
December 2017. The note bears interest at an annual rate of 0.56%. Interest on the unpaid principal balance of the note is due
and payable on the last day of each calendar quarter. In 2015, the $15,000 note represented a non-cash investing and financing
activity in our Consolidated Statements of Cash Flows, while the payments made in 2016 and 2015 are included in our
Consolidated Statements of Cash Flows as net cash used in investing activities in 'Other'.
Legal Contingencies
We are involved in certain legal actions. The outcomes of these legal actions are not within our complete control and may not
be known for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, that could require
significant expenditures or result in lost revenues. We record a liability for these legal actions when a loss is known or
considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a
range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss
is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is
disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. As of
December 31, 2016, there were no litigation matters that we consider to be probable or reasonably possible to have a material
adverse outcome.
54
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
Note 10. Sales by Product Line
The percentages of our sales by product line were as follows:
Type
Fasteners(1)
Tools
Cutting tools
Hydraulics & pneumatics
Material handling
Janitorial supplies
Electrical supplies
Welding supplies
Safety supplies(2)
Metals
Direct ship(3)
Office supplies
Other
Introduced
1967
1993
1996
1996
1996
1996
1997
1997
1999
2001
2004
2010
2016
36.6%
9.9%
5.7%
6.9%
6.4%
7.6%
4.8%
4.6%
2015
38.3%
9.5%
5.6%
7.2%
6.5%
7.5%
4.7%
4.7%
2014
40.2%
9.3%
5.5%
7.2%
6.1%
7.3%
4.7%
4.7%
14.9%
13.9%
12.8%
0.5%
0.5%
0.1%
1.5%
0.5%
0.4%
0.1%
1.1%
0.4%
1.0%
0.1%
0.7%
100.0%
100.0%
100.0%
(1) Fastener product line represents fasteners and miscellaneous supplies.
(2) The safety supplies product line has expanded, as a percentage of sales, in the last several years due to our industrial vending
program.
(3) Direct ship represents a cross section of products from the remaining product lines. The items included here represent certain
items with historically low margins which are shipped directly from our distribution channel to our customers, bypassing our
store network.
Note 11. Subsequent Events
We evaluated all subsequent event activity and concluded that no subsequent events have occurred that would require
recognition in the consolidated financial statements or disclosure in the Notes to Consolidated Financial Statements, with the
exception of the dividend declaration and stock option grant disclosed in Note 4.
Note 12. New Accounting Pronouncements
In August 2015, the Financial Accounting Standards Board ('FASB') issued Accounting Standards Update ('ASU') 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU
2014-09 for all entities by one year. This update is effective for public business entities for annual reporting periods beginning
after December 15, 2017, including interim periods within those reporting periods. Earlier application is permitted only as of
annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
ASU 2014-09 was to become effective for us beginning January 2017. ASU 2015-14 defers our effective date until January
2018 which is when we plan to adopt this standard. The ASU permits two methods of adoption: retrospectively to each prior
reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the
guidance recognized at the date of initial application (the cumulative catch-up transition method). The ASU also requires
expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts
with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant
judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. While we are still in
the process of evaluating the effect of adoption on our consolidated financial statements and are currently assessing our
contracts with customers, we do not currently expect a material impact on our results of operations, cash flows or financial
position. We anticipate we will expand our consolidated financial statement disclosures in order to comply with the new ASU.
We have not yet concluded on our transition method upon adoption, but plan to select a transition method by the middle of
2017.
In February 2016, FASB issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by
lessees for those leases classified as operating leases under previous guidance. The guidance will be effective for annual
reporting periods beginning after December 15, 2018 and interim periods within those fiscal years with early adoption
permitted. The guidance will be applied on a modified retrospective basis with the earliest period presented. Based on the
55
Fastenal Company and Subsidiaries
Notes to Consolidated Financial Statements—Continued
effective date, this guidance would apply beginning January 2019 which is when we plan to adopt this ASU. While we are still
in the process of evaluating the effect of adoption on our consolidated financial statements and are currently assessing our
leases, we expect the adoption will lead to a material increase in the assets and liabilities recorded on our consolidated balance
sheet. As part of our assessment, we will need to determine the impact of lease extension provisions provided in our facility and
vehicle leases which will impact the amount of the right of use asset and lease liability recorded under the new ASU.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The standard
simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income
taxes, forfeitures, and statutory tax withholdings requirements, as well as classification in the consolidated statement of cash
flows. The guidance will be effective for annual reporting periods beginning after December 15, 2016 and interim periods
within those fiscal years. We are currently evaluating the impact of the updated guidance and believe the adoption of the
guidance will impact our accounting for excess tax benefits and deficiencies. We are in the process of determining the financial
statement impact and are currently unable to estimate the impact on our consolidated financial statements and related
disclosures.
Note 13. Selected Quarterly Financial Data (Unaudited)
(Amounts in thousands except per share information)
2016:
First quarter
Second quarter
Third quarter
Fourth quarter
Total
2015:
First quarter
Second quarter
Third quarter
Fourth quarter
Total
Net Sales
$ 986,680
1,014,287
1,013,122
947,947
Gross
Profit
491,460
501,592
499,834
471,891
$ 3,962,036
1,964,777
Net Sales
$ 953,317
997,827
995,250
922,793
Gross
Profit
484,050
502,087
502,225
460,572
$ 3,869,187
1,948,934
Pre-tax
Earnings
199,851
207,817
201,239
180,822
789,729
Net
Earnings
126,227
131,521
126,925
114,805
499,478
Basic Net
Earnings
per Share (1)
0.44
0.46
0.44
0.40
1.73
Diluted Net
Earnings
per Share
0.44
0.45
0.44
0.40
1.73
Pre-tax
Earnings
Net
Earnings
Basic Net
Earnings
per Share
Diluted Net
Earnings
per Share
203,512
225,099
219,204
178,205
826,020
127,606
140,357
136,494
111,904
516,361
0.43
0.48
0.47
0.39
1.77
0.43
0.48
0.47
0.39
1.77
(1) Amounts may not foot due to rounding difference.
***End of Notes to Consolidated Financial Statements***
56
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation
of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the 'Securities Exchange Act')). Based on this evaluation,
the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective
to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is
recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated
and communicated to our management, including the principal executive officer and principal financial officer, to allow for
timely decisions regarding required disclosure.
57
Attestation Report of Independent Registered Public Accounting Firm
The attestation report required under this item is contained earlier in this Form 10-K under the heading 'Item 8, Financial
Statements and Supplementary Data'.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. The Company's internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company's internal
control over financial reporting includes those policies and procedures that:
(i)
(ii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management and directors of the
Company; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of our principal executive officer and our principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
assessment and those criteria, management believes that the Company maintained effective internal control over financial
reporting as of December 31, 2016. There was no change in the Company's internal control over financial reporting during the
Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
/s/ Daniel L. Florness
Daniel L. Florness
President and Chief Executive Officer
/s/ Holden Lewis
Holden Lewis
Executive Vice President and Chief Financial Officer
Winona, Minnesota
February 6, 2017
ITEM 9B. OTHER INFORMATION
None.
58
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Incorporated herein by reference is the information appearing under the headings 'Proposal #1—Election of Directors',
'Corporate Governance and Director Compensation—Board Leadership Structure and Committee Membership', 'Corporate
Governance and Director Compensation—Audit Committee', and 'Corporate Governance and Director Compensation—Section
16(a) Beneficial Ownership Reporting Compliance' in the Proxy Statement.
There have been no material changes to the procedures by which security holders may recommend nominees to the board of
directors since our last report.
In January 2004, our board of directors adopted a supplement to our existing standards of conduct designed to qualify the
standards of conduct as a code of ethics within the meaning of Item 406(b) of Regulation S-K promulgated by the SEC ('Code
of Ethics'). The standards of conduct, as supplemented, apply to all of our directors, officers, and employees, including without
limitation our chief executive officer, chief financial officer, principal accounting officer, and controller (if any), and persons
performing similar functions ('Senior Financial Officers'). Those portions of the standards of conduct, as supplemented, that
constitute a required element of a Code of Ethics are available without charge by submitting a request to us pursuant to the
directions detailed under 'Does Fastenal have a Code of Conduct?' on the 'Investor FAQs' page of the 'Investor Relations'
section of our website at www.fastenal.com. In the event we amend or waive any portion of the standards of conduct, as
supplemented, that constitutes a required element of a Code of Ethics and such amendment or waiver applies to any of our
Senior Financial Officers, we intend to post on our website, within four business days after the date of such amendment or
waiver, a brief description of such amendment or waiver, the name of each Senior Financial Officer to whom the amendment or
waiver applies, and the date of the amendment or waiver.
The executive officers of Fastenal Company are:
Name
Daniel L. Florness
William J. Drazkowski
Leland J. Hein
James C. Jansen
Holden Lewis
Sheryl A. Lisowski
Nicholas J. Lundquist
Charles S. Miller
Terry M. Owen
Gary A. Polipnick
John L. Soderberg
Jeffery M. Watts
Reyne K. Wisecup
Employee of
Fastenal
Since
1996
1995
1985
1992
2016
1994
1979
1999
1999
1983
1993
1996
1988
Age
53
45
56
46
47
49
59
42
48
54
45
45
53
Position
President, Chief Executive Officer, and Director
Executive Vice President – National Accounts Sales
Senior Executive Vice President – Sales
Executive Vice President – Manufacturing
Executive Vice President and Chief Financial Officer
Controller, Chief Accounting Officer, and Treasurer
Senior Executive Vice President – Operations
Executive Vice President – Sales
Senior Executive Vice President – Sales Operations
Executive Vice President – FAST Solutions®
Executive Vice President – Information Technology
Executive Vice President – International Sales
Senior 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. Drazkowski has been our executive vice president - national accounts sales since December 2016. From October 2014 to
December 2016, Mr. Drazkowski was our vice president - national accounts sales. From September 2013 to September 2014,
he served as regional vice president of our Minnesota based region, and from November 2007 to August 2013, he served as one
of our district managers. Prior to November 2007, Mr. Drazkowski served in various sales leadership roles at our Company.
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.
59
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 our 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.
Mr. Lewis has been our executive vice president and chief financial officer since August 2016. From April 2016 to July 2016,
Mr. Lewis was a senior vice president/equity research-industrial technology with FBR Capital Markets & Co. (a full-service
investment bank). From September 2014 to January 2016, Mr. Lewis was a managing director/equity research-industrial
technology with Oppenheimer & Co Inc. (a full-service investment bank). From August 2002 to August 2014, Mr. Lewis was a
managing director/equity research-industrial manufacturing & distribution with BB&T Capital Markets, a division of BB&T
Securities LLC (a full-service investment bank). Prior to August 2002, Mr. Lewis held similar roles with various other
organizations since 1994. In each of Mr. Lewis' positions prior to joining Fastenal, he was responsible for studying the strategic
and financial direction of companies for the purpose of making investment recommendations to institutional clients.
Ms. Lisowski has been our controller, chief accounting officer, and treasurer since August 2016. Ms. Lisowski was our
controller and chief accounting officer from October 2013 to August 2016, and also served as our interim chief financial officer
from January 2016 to August 2016. 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 senior executive vice president - operations since December 2016. Mr. Lundquist's responsibilities
include distribution development, product development, supplier development, and supply chain. From July 2012 to December
2016, Mr. Lundquist was our executive vice president - operations. From November 2007 to July 2012, he was one of our
executive vice presidents - sales, and from December 2002 to November 2007, he 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 at our Company.
Mr. Polipnick has been our executive vice president – FAST Solutions® since January 2016. Mr. Polipnick's responsibilities
include our FAST Solutions® programs 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. Soderberg has been our executive vice president – information technology since May 2016. From May 2014 to May 2016,
Mr. Soderberg served as our executive vice president - sales operations and 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.
Mr. Watts has been our executive vice president - international sales since December 2016. From March 2015 to December
2016, Mr. Watts was our vice president - international sales. From June 2005 to February 2015, he served as regional vice
president of our Canadian region. Prior to June 2005, Mr. Watts served in various sales leadership roles at our Company.
Ms. Wisecup has been our senior executive vice president - human resources since December 2016. From November 2007 to
December 2016, Ms. Wisecup was our executive vice president - human resources. Prior to November 2007, she served in
various support roles, including director of employee development. Ms. Wisecup has also 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.
60
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under the headings 'Corporate Governance and Director
Compensation—Compensation Committee Interlocks and Insider Participation', 'Executive Compensation', and 'Corporate
Governance and Director Compensation—Compensation of our Directors' in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated herein by reference is the information appearing under the heading 'Security Ownership of Principal Shareholders
and Management' in the Proxy Statement.
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security
holders
Total
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants, and Rights
Weighted-
Average Exercise
Price of Outstanding
Options, Warrants, and
Rights
(a)
3,757,947
—
3,757,947
(b)
$46.81
—
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
(c)
5,695,743
—
5,695,743
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated herein by reference is the information appearing under the headings 'Corporate Governance and Director
Compensation—Director Independence and Other Board Matters', 'Corporate Governance and Director Compensation—
Related Person Transaction Approval Policy', and 'Corporate Governance and Director Compensation—Transactions with
Related Persons' in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated herein by reference is the information appearing under the heading 'Audit and Related Matters—Audit and
Related Fees' and 'Audit and Related Matters—Pre-Approval of Services' in the Proxy Statement.
61
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a) 1. Financial Statements:
PART IV
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Earnings for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedules:
Schedule II—Valuation and Qualifying Accounts
3. Exhibits:
3.1
3.2
Restated Articles of Incorporation of Fastenal Company, as amended (incorporated by reference to Exhibit 3.1
to Fastenal Company's Form 10-Q for the quarter ended March 31, 2012)
Restated By-Laws of Fastenal Company (incorporated by reference to Exhibit 3.2 to Fastenal Company's Form
8-K dated as of October 15, 2010 (file no. 000-16125))
4.1
Form of Senior Notes due July 20, 2021 (incorporated by reference to Exhibit 4.1 to Fastenal Company’s
4.2
Form of Senior Notes due July 20, 2022 (incorporated by reference to Exhibit 4.2 to Fastenal Company’s
10.1 Description of Bonus Arrangements for Executive Officers (incorporated by reference to the information
appearing under the heading 'Executive Compensation – Compensation Discussion and Analysis' in the Proxy
Statement)*
10.2
10.3
Fastenal Company Stock Option Plan as amended and restated effective as of December 12, 2014 (incorporated
by reference to Exhibit 10.1 to Fastenal Company's Form 8-K dated December 17, 2014)*
Fastenal Company Incentive Plan (incorporated by reference to Appendix A to Fastenal Company's Proxy
Statement dated February 23, 2012)*
10.4 Credit Agreement dated as of May 1, 2015 among Fastenal Company, the Lenders from time to time party
thereto, and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing
Lender (incorporated by reference to Exhibit 10.1 to Fastenal Company's Form 8-K dated May 5, 2015), as
amended by the First Amendment to Credit Agreement dated as of November 23, 2015 (incorporated by
reference to Exhibit 10.1 to Fastenal Company's Form 8-K dated November 25, 2015)
10.5 Master Note Agreement dated as of July 20, 2016 by and among (i) Fastenal Company, (ii) Metropolitan Life
Insurance Company, NYL Investors LLC and PGIM, Inc. (formerly known as Prudential Investment
Management, Inc.), as investor group representatives (each, an 'Investor Group Representative'), and
(iii) Metropolitan Life Insurance Company (in its capacity as a purchaser of notes under such Master Note
Agreement) and/or affiliates of any Investor Group Representative who become purchasers of notes under such
13
21
23
31
32
101
of July 20, 2016)
Portions of 2016 Annual Report to Shareholders not included in this Form 10-K (only those sections
specifically incorporated by reference in this Form 10-K shall be deemed filed with the SEC)
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Certifications under Section 302 of the Sarbanes-Oxley Act of 2002
Certification under Section 906 of the Sarbanes-Oxley Act of 2002
The following financial statements from Fastenal Company's Annual Report on Form 10-K for the year ended
December 31, 2016, filed on February 6, 2017, formatted in XBRL (Extensible Business Reporting Language):
(i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated
Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders' Equity, (v) the
Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements
We will furnish copies of these Exhibits upon request and payment of our reasonable expenses in furnishing the Exhibits.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to
Item 15(b).
62
ITEM 16. FORM 10-K SUMMARY
Not applicable.
63
FASTENAL COMPANY
Schedule II—Valuation and Qualifying Accounts
Years ended December 31, 2016, 2015, and 2014
(Amounts in thousands)
Balance at
Beginning
of Year
“Additions”
Charged to
Costs and
Expenses
“Other”
Additions
(Deductions)
“Less”
Deductions
Balance
at End
of Year
$ 11,729
$ 31,821
8,550
62,313 (1)
$ 12,619
$ 31,137
8,769
54,341 (1)
$
9,248
11,480
52,858 (1)
—
—
—
—
—
9,030
59,494 (2)
11,249
34,640
9,659
53,657 (2)
11,729
31,821
8,109
52,601 (2)
12,619
31,137
Description
Year ended December 31, 2016
Allowance for doubtful accounts
Insurance reserves
Year ended December 31, 2015
Allowance for doubtful accounts
Insurance reserves
Year ended December 31, 2014
Allowance for doubtful accounts
Insurance reserves
(1) Includes costs and expenses incurred for premiums and claims related to health and general insurance.
(2) Includes costs and expenses paid for premiums and claims related to health and general insurance.
$ 30,880
—
See accompanying Report of Independent Registered Public Accounting Firm incorporated herein by reference.
64
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 6, 2017
FASTENAL COMPANY
By
/s/ Daniel L. Florness
Daniel L. Florness, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the date indicated.
Date: February 6, 2017
/s/ Daniel L. Florness
Daniel L. Florness, President and Chief Executive Officer
(Principal Executive Officer), and Director
/s/ Holden Lewis
Holden Lewis, Executive Vice President and Chief
Financial Officer (Principal Financial Officer)
/s/ Sheryl A. Lisowski
Sheryl A. Lisowski, Controller, Chief Accounting Officer,
and Treasurer (Principal Accounting Officer)
/s/ Willard D. Oberton
Willard D. Oberton, Director (Chairman)
/s/ Michael J. Ancius
Michael J. Ancius, Director
/s/ Michael J. Dolan
Michael J. Dolan, Director
/s/ Stephen L. Eastman
Stephen L. Eastman, Director
/s/ Rita J. Heise
Rita J. Heise, Director
/s/ Darren R. Jackson
Darren R. Jackson, Director
/s/ Daniel L. Johnson
Daniel L. Johnson, Director
/s/ Scott A. Satterlee
Scott A. Satterlee, Director
/s/ Reyne K. Wisecup
Reyne K. Wisecup, Director
65
INDEX TO EXHIBITS
Restated Articles of Incorporation of Fastenal Company, as amended
Incorporated by Reference
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
13
21
23
31
32
Restated By-Laws of Fastenal Company
Form of Senior Notes due July 20, 2021
Form of Senior Notes due July 20, 2022
Description of Bonus Arrangements for Executive Officers
Fastenal Company Stock Option Plan as amended and restated effective as of
December 12, 2014
Fastenal Company Incentive Plan
Credit Agreement dated as of May 1, 2015 among Fastenal Company, the
Lenders from time to time party thereto, and Wells Fargo Bank, National
Association, as Administrative Agent, Swingline Lender and Issuing Lender, as
amended by the First Amendment to Credit Agreement dated as of November
23, 2015
Master Note Agreement dated as of July 20, 2016 by and among (i) Fastenal
Company, (ii) Metropolitan Life Insurance Company, NYL Investors LLC and
PGIM, Inc. (formerly known as Prudential Investment Management, Inc.), as
investor group representatives (each, an 'Investor Group Representative'), and
(iii) Metropolitan Life Insurance Company (in its capacity as a purchaser of
notes under such Master Note Agreement) and/or affiliates of any Investor
Group Representative who become purchasers of notes under such Master Note
Agreement
Portions of 2016 Annual Report to Shareholders not included in this Form 10-K
(only those sections specifically incorporated by reference in this Form 10-K
shall be deemed filed with the SEC)
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Certifications under Section 302 of the Sarbanes-Oxley Act of 2002
Certification under Section 906 of the Sarbanes-Oxley Act of 2002
Incorporated by Reference
Incorporated by Reference
Incorporated by Reference
Incorporated by Reference
Incorporated by Reference
Incorporated by Reference
Incorporated by Reference
Incorporated by Reference
Electronically Filed
Electronically Filed
Electronically Filed
Electronically Filed
Electronically Filed
Electronically Filed
Electronically Filed
Electronically Filed
Electronically Filed
Electronically Filed
Electronically Filed
XBRL Instance Document
EX 101.INS
EX 101.SCH XBRL Taxonomy Extension Schema Document
EX 101.CAL XBRL Taxonomy Calculation Linkbase Document
EX 101.DEF XBRL Taxonomy Definition Linkbase Document
EX 101.LAB XBRL Taxonomy Label Linkbase Document
EX 101.PRE XBRL Taxonomy Presentation Linkbase Document
66
Subsidiaries of Fastenal Company
Geographic
Location
North America
United States
Subsidiary Name
Fastenal International Holdings Company
Fastenal Company Purchasing
Fastenal Company Leasing
Fastenal IP Company
Fastenal Air Fleet, LLC
River Surplus and Supply, LLC
Fastenal Mexico, LLC
Fastenal Canada, Ltd.
Fastenal Mexico Services S. de R.L. de C.V.
Fastenal Mexico S. de R.L. de C.V.
Canada
Mexico
Central & South America
Panama
Fastenal Panama S.A.
Fastenal Latin America, S.A.
Brazil
Fastenal Brasil Importação, Exportação e Distribuição Ltda.
Fastenal Brasil Participacoes Ltda.
Colombia
Fastenal Colombia S.A.S.
Chile
Asia
China
Fastenal Chile SpA
Fastenal Asia Pacific Limited
FASTCO (Shanghai) Trading Co., Ltd.
Fastenal (Shanghai) International Trading Co. Ltd.
Fastenal (Tianjin) International Trading Co. Ltd.
Fastenal (Shenzhen) International Trading Co. Ltd.
India
Fastenal India Sourcing, IT and Procurement Private Ltd.
Fastenal India Wholesale Private Ltd.
Southeast Asia
Singapore
Fastenal Singapore PTE Ltd.
Malaysia
Fastenal Malaysia SDN BHD
Fastenal (Thailand) Ltd.
Thailand
Europe
The Netherlands Fastenal Europe, B.V.
Fastenal Netherlands Holdings, B.V.
Hungary
Fastenal Europe, Kft.
United Kingdom Fastenal Europe, Ltd.
Germany
Fastenal Europe GmbH
Czech Republic Fastenal Europe, s.r.o.
Fastenal Europe S.r.l.
Fastenal Europe RO S.r.l.
Fastenal Europe AB
Fastenal Europe Sp. z o.o.
Fastenal AT GmbH
Italy
Romania
Sweden
Poland
Austria
Africa
South Africa
Exhibit 21
Doing
Business as
Year
Incorporated
Jurisdiction of
Incorporation
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
1994
1997
1997
2005
2006
2014
2016
2008
1999
1999
2009
2011
2011
2011
2012
2013
2003
2003
2012
2012
2012
2013
2013
2001
2009
2012
2003
2015
2009
2010
2011
2011
2011
2012
2013
2013
2016
Minnesota
Minnesota
Minnesota
Minnesota
Minnesota
Minnesota
Minnesota
Canada
Mexico
Mexico
Panama
Panama
Brazil
Brazil
Colombia
Chile
Hong Kong, China
Shanghai, China
Shanghai, China
Tianjin, China
Shenzhen, China
India
India
Singapore
Malaysia
Thailand
The Netherlands
The Netherlands
Hungary
United Kingdom
Germany
Czech Republic
Italy
Romania
Sweden
Poland
Austria
Fastenal South Africa Trading and Distribution (PTY) LTD
Same
2013
South Africa
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Fastenal Company:
We consent to the incorporation by reference in the registration statements (no. 333-52765, no. 333-134211, no. 333-162619,
and no. 333-176401) on Form S-8 of Fastenal Company of our report dated February 6, 2017, relating to the consolidated
balance sheets of Fastenal Company and subsidiaries as of December 31, 2016 and 2015, and the related consolidated
statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2016, and the related financial statement schedule, and the effectiveness of internal control over
financial reporting as of December 31, 2016, which report appears in the December 31, 2016 annual report on Form 10-K, of
Fastenal Company.
Exhibit 23
/s/ KPMG LLP
Minneapolis, Minnesota
February 6, 2017
Exhibit 31
CERTIFICATIONS
I, Daniel L. Florness, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Fastenal Company;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or
persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 6, 2017
/s/ Daniel L. Florness
Daniel L. Florness
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31 (Continued)
CERTIFICATIONS
I, Holden Lewis, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Fastenal Company;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or
persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 6, 2017
/s/ Holden Lewis
Holden Lewis
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies that this periodic report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information
contained in this periodic report fairly presents, in all material respects, the financial condition and results of operations of
Fastenal Company.
A signed original of this written statement required by Section 906 has been provided to Fastenal Company and will be retained
by Fastenal Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32
Date
February 6, 2017
/s/ Daniel L. Florness
Daniel L. Florness
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Holden Lewis
Holden Lewis
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
S
R
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C
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R
D
I
S
R
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C
I
F
F
O
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V
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U
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X
E
WILLARD D. OBERTON
Chairman of the Board, Retired President
and Chief Executive Officer,
Fastenal Company
MICHAEL J. ANCIUS
Director of Strategic Planning, Financing,
and Taxation, Kwik Trip, Inc.
(retail convenience store operator)
MICHAEL J. DOLAN
Self-Employed Business Consultant,
Retired Executive Vice President and
Chief Operating Officer,
The Smead Manufacturing Company
STEPHEN L. EASTMAN
President of the Parts, Garments,
and Accessories Division of
Polaris Industries Inc.
(recreational vehicle manufacturer)
DANIEL L. FLORNESS
RITA J. HEISE
Self-Employed Business Consultant,
Retired Corporate Vice President and
Chief Information Officer of
Cargill, Incorporated
DARREN R. JACKSON
Retired Chief Executive Officer,
Advance Auto Parts, Inc.
DANIEL L. JOHNSON
President and Chief Executive Officer of
M.A. Mortenson Company (family owned
construction company)
SCOTT A. SATTERLEE
Retired President of North America
Surface Transportation Division, C.H.
Robinson Worldwide, Inc.
REYNE K. WISECUP
N
O
I
T
A
M
R
O
F
N
I
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T
A
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O
P
R
O
C
DANIEL L. FLORNESS
President and Chief Executive Officer
CHARLES S. MILLER
Executive Vice President - Sales
WILLIAM J. DRAZKOWSKI
Executive Vice President -
National Accounts Sales
TERRY M. OWEN
Senior Executive Vice President -
Sales Operations
LELAND J. HEIN
Senior Executive Vice President - Sales
JAMES C. JANSEN
Executive Vice President - Manufacturing
HOLDEN LEWIS
Executive Vice President and
Chief Financial Officer
GARY A. POLIPNICK
Executive Vice President -
FAST Solutions®
JOHN L. SODERBERG
Executive Vice President -
Information Technology
JEFFERY M. WATTS
Executive Vice President -
International Sales
SHERYL A. LISOWSKI
Controller, Chief Accounting Officer,
and Treasurer
REYNE K. WISECUP
Senior Executive Vice President -
Human Resources
NICHOLAS J. LUNDQUIST
Senior Executive Vice President -
Operations
ANNUAL
MEETING
The annual meeting of shareholders
will be held at 10:00 a.m., central
time, April 25, 2017, at our home
office located at 2001 Theurer
Boulevard, Winona, Minnesota.
HOME
OFFICE
Fastenal Company
2001 Theurer Boulevard
Winona, Minnesota 55987-0978
Phone: (507) 454-5374
Fax: (507) 453-8049
LEGAL
COUNSEL
Faegre Baker Daniels LLP
Minneapolis, Minnesota
INDEPENDENT
REGISTERED PUBLIC
ACCOUNTING FIRM
KPMG LLP
Minneapolis, Minnesota
FORM
10-K
A copy of our 2016 Annual Report
on Form 10-K to the Securities and
Exchange Commission is available
without charge to shareholders
upon written request to internal
audit at the address of our home
office listed on this page.
Copies of our latest press releases,
unaudited supplemental company
information, and monthly sales
information are available at:
http://investor.fastenal.com.
TRANSFER
AGENT
Wells Fargo Bank, N.A.
Minneapolis, Minnesota
2016 ANNUAL REPORT
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9705201 2016 Annual Report | 01.17 KS | Printed in the USA