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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 stores primarily located in North America. On December 31, 2011, we operated approximately 2,600 company-owned or leased store locations.
Principles of Consolidation
The consolidated financial statements include the accounts of Fastenal Company and its wholly-owned subsidiaries (collectively referred to as 'Fastenal' or by such terms 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, and freight and handling costs billed, net of any related sales incentives paid to customers 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 probable. These criteria are met at the time the product is shipped to, or picked up by, the customer. We recognize billings for freight and handling charges at the time the products are shipped to, or picked up by, the customer. We recognize services at the time the service is provided to the customer. 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 collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales in the accompanying consolidated statements of earnings.
Foreign Currency Translation and Transactions
The functional currency of our foreign operations is the applicable local currency. The functional currency is translated into United States dollars for balance sheet accounts (with the exception of 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. Gains or losses resulting from transactions denominated in foreign currencies are included in operating and administrative expenses in the consolidated statements of earnings.
Cash and Cash Equivalents
Cash and cash equivalents are held primarily at two financial institutions. For purposes of the consolidated statements of cash flows, we consider all highly-liquid money market instruments 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 estimated 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.
Marketable securities as of December 31, 2011 and 2010 consist of common stock and debt securities. We classify our marketable securities as available-for-sale. 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 comprehensive income and are reported as a separate component of stockholders' equity until realized, unless a decline in the market value of any available-for-sale security below cost is deemed other than temporary and is charged to earnings, resulting in the establishment of a new cost basis for the security.
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 buildings 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 that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market value, and third-party independent appraisals, as considered necessary. There were no impairments recorded during the three years reported in these consolidated financial statements.
Leases
We lease space under operating leases for several distribution centers, several manufacturing locations, and certain store locations with initial terms of one to 60 months. Most store locations have initial lease terms of 36 to 48 months. 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 a 36-month period. We lease certain semi-tractors and pick-ups under operating leases. The semi-tractor leases typically have a 36-month term. The pick-up leases typically have a non-cancellable lease term of one year, with renewal options for up to 72-months.
Other Long-Lived Assets
Other assets consist of prepaid security 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.
Goodwill and other identifiable intangible long-lived assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, or on an annual basis if no event or change occurs, to determine that the unamortized balances are recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset, and, in the case of goodwill, by also looking at an adverse change in legal factors or the business climate, a transition to a new product or services strategy, a significant change in the customer base, and/or a realization of failed marketing efforts. If the asset is deemed to be impaired, the amount of impairment is charged to earnings as a part of operating and administrative expenses in the current period. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. 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 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.
Stockholders' Equity and Stock-Based Compensation
We have a stock option employee compensation plan (stock option plan). Our stock option plan was approved by our shareholders in April 2003 and amended by our shareholders in April 2007.
The options granted under our stock option plan vest and become exercisable over a period of up to eight years. Each option will terminate, to the extent not previously exercised, 13 months after the end of the relevant vesting period. Compensation expense equal to the grant date fair value is recognized for these awards over the vesting period.
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 of being 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 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. Therefore we report as a single business segment.
|
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Note 2. Financial Instruments and Marketable Securities
We follow a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to measurements involving significant unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:
| • |
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, included in Level 1 that are observable either directly or indirectly. |
| • |
Level 3 inputs are unobservable for the asset or liability, but are based upon our own assumptions used to measure assets and liabilities at fair value. |
The level in the fair value hierarchy within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
The following table presents the placement in the fair value hierarchy of assets that are measured at fair value on a recurring basis:
|
December 31, 2011: |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Common stock |
$ | 320 | 320 | 0 | 0 | |||||||||||
|
Government and agency securities |
26,845 | 26,845 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total available-for-sale securities |
$ | 27,165 | 27,165 | 0 | 0 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
December 31, 2010: |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Common stock |
$ | 223 | 223 | 0 | 0 | |||||||||||
|
State and municipal bonds |
5,152 | 0 | 5,152 | 0 | ||||||||||||
|
Government and agency securities |
25,844 | 25,844 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total available-for-sale securities |
$ | 31,219 | 26,067 | 5,152 | 0 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
There were no transfers between levels during 2011 and 2010.
As of year end, our financial assets that are measured at fair value on a recurring basis are common stock and debt securities. The government and agency securities have a maturity of twelve months.
Marketable securities, all treated as available-for-sale securities, consist of the following:
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | ||||||||||||||
|
December 31, 2011: |
cost | gains | losses | Fair value | ||||||||||||
|
Common stock |
$ | 197 | 123 | 0 | 320 | |||||||||||
|
Government and agency securities |
26,851 | 0 | (6 | ) | 26,845 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total available-for-sale securities |
$ | 27,048 | 123 | (6 | ) | 27,165 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | ||||||||||||||
|
December 31, 2010: |
cost | gains | losses | Fair value | ||||||||||||
|
Common stock |
$ | 183 | 40 | 0 | 223 | |||||||||||
|
State and municipal bonds |
5,164 | 0 | (12 | ) | 5,152 | |||||||||||
|
Government and agency securities |
25,851 | 0 | (7 | ) | 25,844 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total available-for-sale securities |
$ | 31,198 | 40 | (19 | ) | 31,219 | ||||||||||
|
|
|
|
|
|
|
|
|
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The unrealized gains and losses recorded in accumulated other comprehensive income and the realized gains and losses recorded in earnings were immaterial during the three years reported in these consolidated financial statements.
Future maturities of our available-for-sale securities consist of the following:
| Less than 12 months | Greater than 12 months | |||||||||||||||
| Amortized | Amortized | |||||||||||||||
|
December 31, 2011 |
cost | Fair value | cost | Fair value | ||||||||||||
|
Common stock |
$ | 197 | 320 | 0 | 0 | |||||||||||
|
Government and agency securities |
26,851 | 26,845 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total available-for-sale securities |
$ | 27,048 | 27,165 | 0 | 0 | |||||||||||
|
|
|
|
|
|
|
|
|
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|
|||
Note 3. Long-Lived Assets
Property and equipment
Property and equipment as of December 31 consists of the following:
| Depreciable life | ||||||||||||
| in years | 2011 | 2010 | ||||||||||
|
Land |
— | $ | 31,350 | 28,771 | ||||||||
|
Buildings and improvements |
31 to 40 | 172,372 | 161,444 | |||||||||
|
Automated storage and retrieval equipment |
15 | 61,371 | 50,731 | |||||||||
|
Equipment and shelving |
3 to 10 | 339,471 | 303,656 | |||||||||
|
Transportation equipment |
3 to 5 | 49,074 | 41,171 | |||||||||
|
Construction in progress |
— | 71,466 | 46,559 | |||||||||
|
|
|
|
|
|||||||||
| 725,104 | 632,332 | |||||||||||
|
Less accumulated depreciation |
(289,503 | ) | (268,913 | ) | ||||||||
|
|
|
|
|
|||||||||
|
Net property and equipment |
$ | 435,601 | 363,419 | |||||||||
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|
|
|
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|
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Note 4. Accrued Expenses
Accrued expenses as of December 31 consist of the following:
| 2011 | 2010 | |||||||
|
Payroll and related taxes |
$ | 16,808 | 11,805 | |||||
|
Bonuses and commissions |
16,233 | 14,387 | ||||||
|
Profit sharing contribution |
7,717 | 5,005 | ||||||
|
Insurance |
30,548 | 28,067 | ||||||
|
Promotions |
10,866 | 8,591 | ||||||
|
Sales, real estate, and personal property taxes |
26,676 | 19,360 | ||||||
|
Vehicle loss reserve and deferred rebates |
743 | 1,431 | ||||||
|
Legal reserves |
100 | 6,270 | ||||||
|
Other |
2,271 | 1,496 | ||||||
|
|
|
|
|
|||||
| $ | 111,962 | 96,412 | ||||||
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|
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|
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Note 5. Stockholders' Equity
Our authorized and issued shares (stated in whole numbers) at December 31 consist of the following:
| Par Value | 2011 | 2010 | ||||||||||
|
Preferred Stock |
$ | .01/share | ||||||||||
|
Authorized |
5,000,000 | 5,000,000 | ||||||||||
|
Shares issued |
0 | 0 | ||||||||||
|
Common Stock |
$ | .01/share | ||||||||||
|
Authorized |
400,000,000 | 400,000,000 | ||||||||||
|
Shares issued |
295,258,674 | 294,861,424 | ||||||||||
Dividends
On January 17, 2012, our board of directors declared a quarterly dividend of $0.17 per share of common stock to be paid in cash on February 29, 2012 to shareholders of record at the close of business on February 1, 2012. We paid aggregate annual dividends per share of $0.65, $0.62, and $0.36 in 2011, 2010, and 2009, respectively.
Stock Options
The following tables summarize the details of grants made under our stock option plan, that could be still outstanding, and the assumptions used to value these grants. All options granted were effective at the close of business on the date of grant.
| Shares granted |
Option exercise (strike) price |
Closing stock price on date of grant |
December 31, 2011 | |||||||||||||||||
|
Date of grant |
Options outstanding |
Options vested |
||||||||||||||||||
|
April 19, 2011 |
410,000 | $ | 35.00 | $ | 31.78 | 410,000 | 0 | |||||||||||||
|
April 20, 2010 |
530,000 | $ | 30.00 | $ | 27.13 | 400,000 | 0 | |||||||||||||
|
April 21, 2009 |
790,000 | $ | 27.00 | $ | 17.61 | 600,000 | 0 | |||||||||||||
|
April 15, 2008 |
550,000 | $ | 27.00 | $ | 24.35 | 350,000 | 0 | |||||||||||||
|
April 17, 2007 |
4,380,000 | $ | 22.50 | $ | 20.15 | 3,372,750 | 1,852,750 | |||||||||||||
|
Date of grant |
Risk-free interest rate |
Expected life of option in years |
Expected dividend yield |
Expected stock volatility |
Estimated fair value of stock option |
|||||||||||||||
|
April 19, 2011 |
2.1 | % | 5.00 | 1.6 | % | 39.33 | % | $ | 11.20 | |||||||||||
|
April 20, 2010 |
2.6 | % | 5.00 | 1.5 | % | 39.10 | % | $ | 8.14 | |||||||||||
|
April 21, 2009 |
1.9 | % | 5.00 | 1.0 | % | 38.80 | % | $ | 3.64 | |||||||||||
|
April 15, 2008 |
2.7 | % | 5.00 | 1.0 | % | 30.93 | % | $ | 7.75 | |||||||||||
|
April 17, 2007 |
4.6 | % | 4.85 | 1.0 | % | 31.59 | % | $ | 5.63 | |||||||||||
All of the options in the tables above vest and become exercisable over a period of up to eight years. Each option will terminate, to the extent not previously exercised, 13 months after the end of the relevant vesting period.
The fair value of each share-based option was estimated on the date of grant using a Black-Scholes valuation method that uses the assumptions listed above. 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. Expected volatilities are based on the movement of our stock over the most recent historical period equivalent to the expected life of the option. The risk-free interest rate is based on the U.S. Treasury rate over the expected life at the time of grant. The dividend yield is estimated over the expected life based on our current dividend payout, historical dividends paid, and expected future cash dividends.
A summary of the activity under our stock option plan is as follows:
| Options outstanding |
Exercise Price1 |
Remaining Life2 |
||||||||||
|
Outstanding as of January 1, 2011 |
5,320,000 | $ | 24.03 | 5.50 | ||||||||
|
Granted |
410,000 | $ | 35.00 | 7.93 | ||||||||
|
Exercised/earned |
(397,250 | ) | $ | 22.50 | ||||||||
|
Cancelled/forfeited |
(200,000 | ) | $ | 26.78 | ||||||||
|
|
|
|
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|
|
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|
Outstanding as of December 31, 2011 |
5,132,750 | $ | 24.92 | 4.72 | ||||||||
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|
|
|
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|
Exercisable as of December 31, 2011 |
1,852,750 | $ | 22.50 | 3.16 | ||||||||
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| Options outstanding |
Exercise Price1 |
Remaining Life2 |
||||||||||
|
Outstanding as of January 1, 2010 |
5,120,000 | $ | 23.54 | 6.28 | ||||||||
|
Granted |
530,000 | $ | 30.00 | 8.41 | ||||||||
|
Exercised/earned |
0 | 0 | ||||||||||
|
Cancelled/forfeited |
(330,000 | ) | $ | 26.00 | ||||||||
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|
|
|
|
|
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|
Outstanding as of December 31, 2010 |
5,320,000 | $ | 24.03 | 5.50 | ||||||||
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|
Exercisable as of December 31, 2010 |
638,000 | $ | 22.50 | 2.57 | ||||||||
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|||||||
| 1 |
Weighted-average exercise price |
| 2 |
Weighted-average remaining contractual life in years |
The total intrinsic value of stock options exercised during the years ended December 31, 2011, 2010, and 2009 was $4,977, $0, and $0, respectively.
A summary of the status of the nonvested shares under our stock option plan is as follows:
|
Nonvested shares |
Shares | Weighted average grant- date fair value |
||||||
|
Outstanding as of January 1, 2011 |
4,682,000 | $ | 5.85 | |||||
|
Granted |
410,000 | 11.20 | ||||||
|
Vested |
(1,612,000 | ) | 5.69 | |||||
|
Forfeited |
(200,000 | ) | 6.77 | |||||
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|
Outstanding as of December 31, 2011 |
3,280,000 | $ | 6.54 | |||||
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|
Nonvested shares |
Shares | Weighted average grant- date fair value |
||||||
|
Outstanding as of January 1, 2010 |
4,700,000 | $ | 5.55 | |||||
|
Granted |
530,000 | 8.14 | ||||||
|
Vested |
(218,000 | ) | 5.16 | |||||
|
Forfeited |
(330,000 | ) | 5.77 | |||||
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|
Outstanding as of December 31, 2010 |
4,682,000 | $ | 5.85 | |||||
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At December 31, 2011, there was $15,145 of total unrecognized compensation cost related to unvested stock options granted under the plan. The cost is expected to be recognized over a weighted average period of 4.70 years. The total fair value of shares vested under our stock option plan during 2011, 2010, and 2009 was $9,168, $1,125, and $2,080, respectively.
Total stock-based compensation expense related to our stock option plan was $4,050, $4,030, and $3,850 for 2011, 2010, and 2009, 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 |
2011 | 2010 | 2009 | |||||||||
|
Basic-weighted average shares outstanding |
295,053,790 | 294,861,424 | 296,715,970 | |||||||||
|
Weighted shares assumed upon exercise of stock options |
814,936 | 0 | 0 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Diluted-weighted average shares outstanding |
295,868,726 | 294,861,424 | 296,715,970 | |||||||||
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|
Summary of anti-dilutive options excluded |
2011 | 2010 | 2009 | |||||||||
|
Options to purchase shares of common stock |
704,384 | 5,328,246 | 5,255,120 | |||||||||
|
Weighted-average exercise prices of options |
$ | 32.05 | 23.94 | 23.57 | ||||||||
Any dilutive impact summarized above would relate to periods when the average market price of our stock exceeded the exercise price of the potentially dilutive option securities then outstanding.
|
|||
Note 6. 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. In addition to the contributions of our employees, we make a profit sharing contribution on an annual basis based on an established formula. Our contribution, under this profit sharing formula was approximately $7,717, $5,005 and $0 for 2011, 2010, and 2009, respectively.
|
|||
Note 7. Income Taxes
Earnings before income taxes were derived from the following sources:
| 2011 | 2010 | 2009 | ||||||||||
|
Domestic |
$ | 545,527 | 409,068 | 296,227 | ||||||||
|
Foreign |
29,554 | 21,572 | 1,263 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 575,081 | 430,640 | 297,490 | |||||||||
|
|
|
|
|
|
|
|||||||
Components of income tax expense (benefit) are as follows:
|
2011 : |
Current | Deferred | Total | |||||||||
|
Federal |
$ | 164,125 | 17,343 | 181,468 | ||||||||
|
State |
28,669 | (244 | ) | 28,425 | ||||||||
|
Foreign |
8,683 | (1,424 | ) | 7,259 | ||||||||
|
|
|
|
|
|
|
|||||||
| $ | 201,477 | 15,675 | 217,152 | |||||||||
|
|
|
|
|
|
|
|||||||
|
2010 : |
Current | Deferred | Total | |||||||||
|
Federal |
$ | 136,247 | (936 | ) | 135,311 | |||||||
|
State |
22,914 | (492 | ) | 22,422 | ||||||||
|
Foreign |
4,448 | 3,103 | 7,551 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 163,609 | 1,675 | 165,284 | |||||||||
|
|
|
|
|
|
|
|||||||
|
2009 : |
Current | Deferred | Total | |||||||||
|
Federal |
$ | 93,469 | 4,855 | 98,324 | ||||||||
|
State |
13,733 | 698 | 14,431 | |||||||||
|
Foreign |
1,210 | (832 | ) | 378 | ||||||||
|
|
|
|
|
|
|
|||||||
| $ | 108,412 | 4,721 | 113,133 | |||||||||
|
|
|
|
|
|
|
|||||||
Income tax expense in the accompanying consolidated financial statements differs from the expected expense as follows:
| 2011 | 2010 | 2009 | ||||||||||
|
Federal income tax expense at the 'expected' rate of 35% |
$ | 201,278 | 150,724 | 104,122 | ||||||||
|
Increase (decrease) attributed to: |
||||||||||||
|
State income taxes, net of federal benefit |
18,210 | 14,259 | 9,650 | |||||||||
|
State tax matters |
737 | 1,238 | 785 | |||||||||
|
Other, net |
(3,073 | ) | (937 | ) | (1,424 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total income tax expense |
$ | 217,152 | 165,284 | 113,133 | ||||||||
|
|
|
|
|
|
|
|||||||
The tax effects of temporary differences that give rise to deferred income tax assets and liabilities as of December 31 are as follows:
| 2011 | 2010 | |||||||
|
Deferred income tax asset (liability): |
||||||||
|
Inventory costing and valuation methods |
$ | 4,643 | 4,689 | |||||
|
Allowance for doubtful accounts receivable |
2,202 | 1,836 | ||||||
|
Insurance claims payable |
10,807 | 9,486 | ||||||
|
Promotions payable |
797 | 456 | ||||||
|
Accrued legal reserves |
39 | 2,458 | ||||||
|
Stock based compensation |
5,853 | 5,218 | ||||||
|
Federal and state benefit of uncertain tax positions |
1,632 | 1,253 | ||||||
|
Other, net |
920 | 379 | ||||||
|
|
|
|
|
|||||
|
Total deferred income tax assets |
26,893 | 25,775 | ||||||
|
|
|
|
|
|||||
|
Fixed assets |
(48,329 | ) | (31,464 | ) | ||||
|
|
|
|
|
|||||
|
Total deferred income tax liabilities |
(48,329 | ) | (31,464 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred income tax asset (liability) |
$ | (21,436 | ) | (5,689 | ) | |||
|
|
|
|
|
|||||
No significant valuation allowance for deferred tax assets was necessary as of December 31, 2011 and 2010. The character of the deferred tax assets is such that they can typically be realized through carryback to prior tax periods or offset against future taxable income.
A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows:
| 2011 | 2010 | |||||||
|
Balance at January 1, |
$ | 3,617 | 1,605 | |||||
|
Increase related to prior year tax positions |
578 | 1,666 | ||||||
|
Decrease related to prior year tax positions |
(65 | ) | (111 | ) | ||||
|
Increase related to current year tax positions |
523 | 457 | ||||||
|
Decrease related to statute of limitation lapses |
0 | 0 | ||||||
|
Settlements |
0 | 0 | ||||||
|
|
|
|
|
|||||
|
Balance at December 31, |
$ | 4,653 | 3,617 | |||||
|
|
|
|
|
|||||
Included in the liability for 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 unrecognized tax benefits that would favorably impact the effective tax rate, if recognized, is not material.
Fastenal Company or one of its subsidiaries files income tax returns in the United States federal jurisdiction, all states, and various foreign jurisdictions. With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before 2008 in the case of United States federal and non-United States examinations and 2007 in the case of state and local examinations.
|
|||
Note 8. Geographic Information
Our revenues and long-lived assets (except marketable securities) relate to the following geographic areas:
|
Revenues |
2011 | 2010 | 2009 | |||||||||
|
United States |
$ | 2,474,805 | 2,067,860 | 1,769,938 | ||||||||
|
Canada |
198,592 | 145,078 | 115,323 | |||||||||
|
Other foreign countries |
93,462 | 56,533 | 45,069 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 2,766,859 | 2,269,471 | 1,930,330 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Long-Lived Assets |
2011 | 2010 | 2009 | |||||||||
|
United States |
$ | 426,329 | 361,083 | 324,701 | ||||||||
|
Canada |
11,105 | 9,536 | 8,947 | |||||||||
|
Other foreign countries |
11,376 | 6,814 | 5,108 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 448,810 | 377,433 | 338,756 | |||||||||
|
|
|
|
|
|
|
|||||||
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 property and equipment, location security deposits, goodwill, and other intangibles. Revenues are attributed to countries based on the location of the store from which the sale occurred. No single customer represents more than 10% of our consolidated net sales.
|
|||
Note 9. Operating Leases
We lease space under non-cancelable operating leases for several distribution centers, several manufacturing locations, and certain store locations with initial terms of one to 60 months. Most store locations have initial lease terms of 36 to 48 months. 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, with a net book value of $2,377 at December 31, 2011, on operating leases are amortized over a 36-month period. We lease certain semi-tractors and pick-ups under operating leases. The semi-tractor leases typically have a 36-month term. The pick-up leases typically have a non-cancellable lease term of approximately one year, with renewal options for up to 72-months. Our average lease term for pick-ups is typically for 28 to 36 months. Future minimum annual rentals for the leased facilities and the leased vehicles are as follows:
| Leased facilities |
Leased vehicles |
Total | ||||||||||
|
2012 |
$ | 84,519 | 17,330 | 101,849 | ||||||||
|
2013 |
62,386 | 9,079 | 71,465 | |||||||||
|
2014 |
40,795 | 4,126 | 44,921 | |||||||||
|
2015 |
24,683 | 0 | 24,683 | |||||||||
|
2016 |
10,687 | 0 | 10,687 | |||||||||
|
2017 and thereafter |
0 | 0 | 0 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 223,070 | 30,535 | 253,605 | |||||||||
|
|
|
|
|
|
|
|||||||
Rent expense under all operating leases was as follows:
| Leased facilities |
Leased vehicles |
Total | ||||||||||
|
2011 |
$ | 95,808 | 23,866 | 119,674 | ||||||||
|
2010 |
$ | 92,854 | 21,540 | 114,394 | ||||||||
|
2009 |
$ | 91,270 | 26,295 | 117,565 | ||||||||
Certain operating leases for vehicles contain residual value guarantee provisions which would 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 is approximately $44,948. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote, except for a $743 loss on disposal reserve provided at December 31, 2011. Our fleet also contains vehicles we estimate will settle at a gain. Gains on these vehicles will be recognized when we sell or dispose of the vehicle or at the end of the lease term.
|
|||
Note 10. Commitments and Contingencies
Credit Facilities and Commitments
We have a line of credit arrangement with a bank which expires August 4, 2012. The line allows for borrowings of up to $8,000 at 0.9% over the LIBOR rate. On December 31, 2011 there was $0 outstanding on the line. We do not pay a fee for the unused portion of this line.
We maintain certain government and agency securities as collateral for the benefit of our insurance carrier. As of December 31, 2011, the total balance of these government and agency securities was $26,845. The classification and valuation of these securities are discussed in notes 1 and 2.
During 2001, we completed the construction of a new building for our Kansas City warehouse, and completed an expansion of this warehouse in 2004. We were required to obtain financing for the construction and expansion of this facility under an Industrial Revenue Bond (IRB). We subsequently purchased 100% of the outstanding bonds under the IRB at par. In addition to purchasing the outstanding obligations, we have a right of offset included in the IRB debt agreement. Accordingly, we have netted the impact of the IRB in the accompanying consolidated financial statements. The outstanding balance of the IRB was $9,733 at December 31, 2011 and 2010. On February 1, 2012, approximately $6,579 of the IRB became due which effectively eliminated this portion of the IRB.
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. Negative outcomes for our litigation matters are not considered probable or cannot be reasonably estimated.
In early February 2010, we received a letter from a California fastener supplier dated January 26, 2010. This letter threatened to sue us for an alleged violation of an exclusive distribution arrangement this supplier believes exists between our organizations. In addition to the letter, this supplier provided a press release and a video regarding the claim that they threatened to make public unless we agreed to mediation of the claim. Shortly after receipt of this letter, we performed a preliminary internal review to understand (1) who this supplier was and (2) the nature of our relationship with this supplier. Based on that review, we determined that this supplier manufactures a niche type of fastener and that the total volume of purchases by us, from all suppliers, over the purported term of the alleged exclusivity arrangement of this niche type of fastener did not exceed $1 million. Following completion of our preliminary internal review, we requested additional information and documentation from the supplier. The supplier's response failed to provide the requested information and documentation. By letter dated February 26, 2010, we quantified for the supplier our total volume of purchases as discussed above and informed the supplier that we believed their claim was grossly exaggerated and completely unsupported. We have not received any direct response to our February 26, 2010 letter. On May 3, 2010, this supplier filed suit in Arkansas federal court alleging damages. In response, we filed a motion to dismiss. This motion to dismiss was denied on August 16, 2010. We subsequently filed two motions for summary judgment. The first summary judgment motion was partially denied.
On August 24, 2011, the court issued an order granting Fastenal's second motion for summary judgment in its entirety. On September 8, 2011, this supplier filed an appeal in connection with the order granting Fastenal's second motion for summary judgment. On December 16, 2011, the court issued an order granting, in part, Fastenal's request to recover on its Bill of Costs and Petition for Attorney's Fees from this supplier, which order this supplier appealed on January 9, 2012. Both appealed orders are pending. Based on current information, we believe the prospect that we will incur a material liability as a result of this claim is remote. While we are not required to disclose this matter under the rules of the Securities and Exchange Commission, we initially disclosed the existence of this threat in February 2010 (in our 2009 annual report on Form 10-K) as we believed that disclosure was prudent due to the alleged amount ($180 million) of the claim and the threat to make these allegations public.
|
|||
Note 11. Sales by Product Line
The percentages of our net sales by product line are as follows:
|
Type |
Introduced | 2011 | 2010 | 2009 | ||||||||||||
|
Fasteners1 |
1967 | 46.9 | % | 49.1 | % | 50.0 | % | |||||||||
|
Tools |
1993 | 9.4 | % | 9.3 | % | 9.9 | % | |||||||||
|
Cutting tools |
1996 | 4.6 | % | 4.4 | % | 4.4 | % | |||||||||
|
Hydraulics & pneumatics |
1996 | 7.8 | % | 7.2 | % | 6.9 | % | |||||||||
|
Material handling |
1996 | 6.1 | % | 6.1 | % | 5.9 | % | |||||||||
|
Janitorial supplies |
1996 | 6.2 | % | 6.1 | % | 6.1 | % | |||||||||
|
Electrical supplies |
1997 | 4.7 | % | 4.6 | % | 4.4 | % | |||||||||
|
Welding supplies |
1997 | 3.9 | % | 3.6 | % | 3.6 | % | |||||||||
|
Safety supplies |
1999 | 7.9 | % | 7.0 | % | 6.3 | % | |||||||||
|
Metals |
2001 | 0.5 | % | 0.5 | % | 0.6 | % | |||||||||
|
Direct ship2 |
2004 | 1.6 | % | 1.6 | % | 1.8 | % | |||||||||
|
Office supplies |
2010 | 0.1 | % | 0.1 | % | 0.0 | % | |||||||||
|
Other |
0.3 | % | 0.4 | % | 0.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 |
Fastener product line represents fasteners and miscellaneous supplies. |
| 2 |
Direct ship represents a cross section of products from the eleven 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 12. Subsequent Events
We evaluated all subsequent event activity and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements.
|
|||
Note 13. New and Proposed Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-06, Comprehensive Income (Topic 820). This accounting standard update eliminates the option to present components of other comprehensive income as part of the statement of equity and requires that the total of comprehensive income, the components of net income, and the components of other comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. It also requires presentation on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This accounting standard update is effective beginning in our first quarter of fiscal 2012.
In August 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment. This update approved a revised accounting standard update intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. We adopted this accounting standard update in the third quarter of fiscal 2011. The adoption of this accounting standard update did not have a material impact on our financial statements.
Proposed Accounting Pronouncements
In recent exposure drafts, the International Accounting Standards Board (IASB) and the FASB proposed a new approach to the accounting for leases. From a lessee's perspective, the exposure drafts propose to abolish the distinction between operating and finance/capital leases. In its place, a right-of-use model would be used. This proposal, as currently written, would require the lessee to recognize an asset for its right to use the underlying leased asset and a liability for its obligation to make lease payments. This would lead to an increase in assets and liabilities for leases currently classified as an operating lease and could also lead to a change in timing as to when the expense is recognized. This exposure draft is not yet finalized; however, we believe knowledge of this information is useful to the reader of our financial statements as many of our store locations and many of our vehicles are currently leased, and those leases are accounted for as operating leases.
|
|||
Selected Quarterly Financial Data (Unaudited)
(Amounts in thousands except per share information)
|
2011 : |
Net sales | Gross profit |
Pre-tax earnings |
Net earnings |
Basic earnings per share1 |
|||||||||||||||
|
First quarter |
$ | 640,583 | 333,380 | 128,811 | 79,547 | 0.27 | ||||||||||||||
|
Second quarter |
701,730 | 366,233 | 150,182 | 94,112 | 0.32 | |||||||||||||||
|
Third quarter |
726,742 | 377,381 | 155,319 | 96,798 | 0.33 | |||||||||||||||
|
Fourth quarter |
697,804 | 357,178 | 140,769 | 87,472 | 0.30 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total |
$ | 2,766,859 | 1,434,172 | 575,081 | 357,929 | 1.21 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
2010 : |
Net sales | Gross profit |
Pre-tax earnings |
Net earnings |
Basic earnings per share1 |
|||||||||||||||
|
First quarter |
$ | 520,772 | 265,913 | 90,669 | 56,034 | 0.19 | ||||||||||||||
|
Second quarter |
571,183 | 297,658 | 112,125 | 69,167 | 0.23 | |||||||||||||||
|
Third quarter |
603,750 | 312,648 | 120,702 | 74,994 | 0.25 | |||||||||||||||
|
Fourth quarter |
573,766 | 298,617 | 107,144 | 65,161 | 0.22 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total |
$ | 2,269,471 | 1,174,836 | 430,640 | 265,356 | 0.90 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
1 Note – Amounts may not foot due to rounding difference.
|
|||
Schedule II—Valuation and Qualifying Accounts
Years ended December 31, 2011, 2010, and 2009
(Amounts in thousands)
|
Description |
Balance at beginning of year |
"Additions" charged to costs and expenses |
"Other" additions (deductions) |
"Less" deductions |
Balance at end of year |
|||||||||||||||
|
Year ended December 31, 2011 |
||||||||||||||||||||
|
Allowance for doubtful accounts |
$ | 4,761 | 9,217 | 0 | 8,331 | 5,647 | ||||||||||||||
|
Insurance reserves |
$ | 28,067 | 46,287 | 1 | 0 | 43,806 | 2 | 30,548 | ||||||||||||
|
Year ended December 31, 2010 |
||||||||||||||||||||
|
Allowance for doubtful accounts |
$ | 4,086 | 8,658 | 0 | 7,983 | 4,761 | ||||||||||||||
|
Insurance reserves |
$ | 23,722 | 47,848 | 1 | 0 | 43,503 | 2 | 28,067 | ||||||||||||
|
Year ended December 31, 2009 |
||||||||||||||||||||
|
Allowance for doubtful accounts |
$ | 2,660 | 9,409 | 0 | 7,983 | 4,086 | ||||||||||||||
|
Insurance reserves |
$ | 18,967 | 48,203 | 1 | 0 | 43,448 | 2 | 23,722 | ||||||||||||
| 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. |
|
|||
Business Overview
Fastenal is a leader in the wholesale distribution of industrial and construction supplies operating stores primarily located in North America. On December 31, 2011, we operated approximately 2,600 company-owned or leased store locations.
Principles of Consolidation
The consolidated financial statements include the accounts of Fastenal Company and its wholly-owned subsidiaries (collectively referred to as 'Fastenal' or by such terms 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, and freight and handling costs billed, net of any related sales incentives paid to customers 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 probable. These criteria are met at the time the product is shipped to, or picked up by, the customer. We recognize billings for freight and handling charges at the time the products are shipped to, or picked up by, the customer. We recognize services at the time the service is provided to the customer. 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 collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales in the accompanying consolidated statements of earnings.
Foreign Currency Translation and Transactions
The functional currency of our foreign operations is the applicable local currency. The functional currency is translated into United States dollars for balance sheet accounts (with the exception of 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. Gains or losses resulting from transactions denominated in foreign currencies are included in operating and administrative expenses in the consolidated statements of earnings.
Cash and Cash Equivalents
Cash and cash equivalents are held primarily at two financial institutions. For purposes of the consolidated statements of cash flows, we consider all highly-liquid money market instruments 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 estimated 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.
Marketable securities as of December 31, 2011 and 2010 consist of common stock and debt securities. We classify our marketable securities as available-for-sale. 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 comprehensive income and are reported as a separate component of stockholders' equity until realized, unless a decline in the market value of any available-for-sale security below cost is deemed other than temporary and is charged to earnings, resulting in the establishment of a new cost basis for the security.
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 buildings 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 that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market value, and third-party independent appraisals, as considered necessary. There were no impairments recorded during the three years reported in these consolidated financial statements.
Leases
We lease space under operating leases for several distribution centers, several manufacturing locations, and certain store locations with initial terms of one to 60 months. Most store locations have initial lease terms of 36 to 48 months. 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 a 36-month period. We lease certain semi-tractors and pick-ups under operating leases. The semi-tractor leases typically have a 36-month term. The pick-up leases typically have a non-cancellable lease term of one year, with renewal options for up to 72-months.
Other Long-Lived Assets
Other assets consist of prepaid security 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.
Goodwill and other identifiable intangible long-lived assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, or on an annual basis if no event or change occurs, to determine that the unamortized balances are recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset, and, in the case of goodwill, by also looking at an adverse change in legal factors or the business climate, a transition to a new product or services strategy, a significant change in the customer base, and/or a realization of failed marketing efforts. If the asset is deemed to be impaired, the amount of impairment is charged to earnings as a part of operating and administrative expenses in the current period. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
Accounting Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. 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 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.
Stockholders' Equity and Stock-Based Compensation
We have a stock option employee compensation plan (stock option plan). Our stock option plan was approved by our shareholders in April 2003 and amended by our shareholders in April 2007.
The options granted under our stock option plan vest and become exercisable over a period of up to eight years. Each option will terminate, to the extent not previously exercised, 13 months after the end of the relevant vesting period. Compensation expense equal to the grant date fair value is recognized for these awards over the vesting period.
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 of being 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 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. Therefore we report as a single business segment.
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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 property and equipment, location security deposits, goodwill, and other intangibles. Revenues are attributed to countries based on the location of the store from which the sale occurred. No single customer represents more than 10% of our consolidated net sales.
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December 31, 2011: |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Common stock |
$ | 320 | 320 | 0 | 0 | |||||||||||
|
Government and agency securities |
26,845 | 26,845 | 0 | 0 | ||||||||||||
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|
|
|
|
|
|
|
|
|||||||||
|
Total available-for-sale securities |
$ | 27,165 | 27,165 | 0 | 0 | |||||||||||
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|
December 31, 2010: |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Common stock |
$ | 223 | 223 | 0 | 0 | |||||||||||
|
State and municipal bonds |
5,152 | 0 | 5,152 | 0 | ||||||||||||
|
Government and agency securities |
25,844 | 25,844 | 0 | 0 | ||||||||||||
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|
|
|
|
|
|
|
|
|||||||||
|
Total available-for-sale securities |
$ | 31,219 | 26,067 | 5,152 | 0 | |||||||||||
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|||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | ||||||||||||||
|
December 31, 2011: |
cost | gains | losses | Fair value | ||||||||||||
|
Common stock |
$ | 197 | 123 | 0 | 320 | |||||||||||
|
Government and agency securities |
26,851 | 0 | (6 | ) | 26,845 | |||||||||||
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|
|
|
|
|
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|||||||||
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Total available-for-sale securities |
$ | 27,048 | 123 | (6 | ) | 27,165 | ||||||||||
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| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | ||||||||||||||
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December 31, 2010: |
cost | gains | losses | Fair value | ||||||||||||
|
Common stock |
$ | 183 | 40 | 0 | 223 | |||||||||||
|
State and municipal bonds |
5,164 | 0 | (12 | ) | 5,152 | |||||||||||
|
Government and agency securities |
25,851 | 0 | (7 | ) | 25,844 | |||||||||||
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Total available-for-sale securities |
$ | 31,198 | 40 | (19 | ) | 31,219 | ||||||||||
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| Less than 12 months | Greater than 12 months | |||||||||||||||
| Amortized | Amortized | |||||||||||||||
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December 31, 2011 |
cost | Fair value | cost | Fair value | ||||||||||||
|
Common stock |
$ | 197 | 320 | 0 | 0 | |||||||||||
|
Government and agency securities |
26,851 | 26,845 | 0 | 0 | ||||||||||||
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|
|
|
|
|
|
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|||||||||
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Total available-for-sale securities |
$ | 27,048 | 27,165 | 0 | 0 | |||||||||||
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| Depreciable life | ||||||||||||
| in years | 2011 | 2010 | ||||||||||
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Land |
— | $ | 31,350 | 28,771 | ||||||||
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Buildings and improvements |
31 to 40 | 172,372 | 161,444 | |||||||||
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Automated storage and retrieval equipment |
15 | 61,371 | 50,731 | |||||||||
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Equipment and shelving |
3 to 10 | 339,471 | 303,656 | |||||||||
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Transportation equipment |
3 to 5 | 49,074 | 41,171 | |||||||||
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Construction in progress |
— | 71,466 | 46,559 | |||||||||
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|||||||||
| 725,104 | 632,332 | |||||||||||
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Less accumulated depreciation |
(289,503 | ) | (268,913 | ) | ||||||||
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Net property and equipment |
$ | 435,601 | 363,419 | |||||||||
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| 2011 | 2010 | |||||||
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Payroll and related taxes |
$ | 16,808 | 11,805 | |||||
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Bonuses and commissions |
16,233 | 14,387 | ||||||
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Profit sharing contribution |
7,717 | 5,005 | ||||||
|
Insurance |
30,548 | 28,067 | ||||||
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Promotions |
10,866 | 8,591 | ||||||
|
Sales, real estate, and personal property taxes |
26,676 | 19,360 | ||||||
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Vehicle loss reserve and deferred rebates |
743 | 1,431 | ||||||
|
Legal reserves |
100 | 6,270 | ||||||
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Other |
2,271 | 1,496 | ||||||
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|
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| $ | 111,962 | 96,412 | ||||||
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| Par Value | 2011 | 2010 | ||||||||||
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Preferred Stock |
$ | .01/share | ||||||||||
|
Authorized |
5,000,000 | 5,000,000 | ||||||||||
|
Shares issued |
0 | 0 | ||||||||||
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Common Stock |
$ | .01/share | ||||||||||
|
Authorized |
400,000,000 | 400,000,000 | ||||||||||
|
Shares issued |
295,258,674 | 294,861,424 | ||||||||||
| Shares granted |
Option exercise (strike) price |
Closing stock price on date of grant |
December 31, 2011 | |||||||||||||||||
|
Date of grant |
Options outstanding |
Options vested |
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April 19, 2011 |
410,000 | $ | 35.00 | $ | 31.78 | 410,000 | 0 | |||||||||||||
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April 20, 2010 |
530,000 | $ | 30.00 | $ | 27.13 | 400,000 | 0 | |||||||||||||
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April 21, 2009 |
790,000 | $ | 27.00 | $ | 17.61 | 600,000 | 0 | |||||||||||||
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April 15, 2008 |
550,000 | $ | 27.00 | $ | 24.35 | 350,000 | 0 | |||||||||||||
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April 17, 2007 |
4,380,000 | $ | 22.50 | $ | 20.15 | 3,372,750 | 1,852,750 | |||||||||||||
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Date of grant |
Risk-free interest rate |
Expected life of option in years |
Expected dividend yield |
Expected stock volatility |
Estimated fair value of stock option |
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April 19, 2011 |
2.1 | % | 5.00 | 1.6 | % | 39.33 | % | $ | 11.20 | |||||||||||
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April 20, 2010 |
2.6 | % | 5.00 | 1.5 | % | 39.10 | % | $ | 8.14 | |||||||||||
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April 21, 2009 |
1.9 | % | 5.00 | 1.0 | % | 38.80 | % | $ | 3.64 | |||||||||||
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April 15, 2008 |
2.7 | % | 5.00 | 1.0 | % | 30.93 | % | $ | 7.75 | |||||||||||
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April 17, 2007 |
4.6 | % | 4.85 | 1.0 | % | 31.59 | % | $ | 5.63 | |||||||||||
| Options outstanding |
Exercise Price1 |
Remaining Life2 |
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Outstanding as of January 1, 2011 |
5,320,000 | $ | 24.03 | 5.50 | ||||||||
|
Granted |
410,000 | $ | 35.00 | 7.93 | ||||||||
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Exercised/earned |
(397,250 | ) | $ | 22.50 | ||||||||
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Cancelled/forfeited |
(200,000 | ) | $ | 26.78 | ||||||||
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Outstanding as of December 31, 2011 |
5,132,750 | $ | 24.92 | 4.72 | ||||||||
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Exercisable as of December 31, 2011 |
1,852,750 | $ | 22.50 | 3.16 | ||||||||
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|||||||
| 1 |
Weighted-average exercise price |
| 2 |
Weighted-average remaining contractual life in years |
| Options outstanding |
Exercise Price1 |
Remaining Life2 |
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Outstanding as of January 1, 2010 |
5,120,000 | $ | 23.54 | 6.28 | ||||||||
|
Granted |
530,000 | $ | 30.00 | 8.41 | ||||||||
|
Exercised/earned |
0 | 0 | ||||||||||
|
Cancelled/forfeited |
(330,000 | ) | $ | 26.00 | ||||||||
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|
Outstanding as of December 31, 2010 |
5,320,000 | $ | 24.03 | 5.50 | ||||||||
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Exercisable as of December 31, 2010 |
638,000 | $ | 22.50 | 2.57 | ||||||||
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| 1 |
Weighted-average exercise price |
| 2 |
Weighted-average remaining contractual life in years |
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Nonvested shares |
Shares | Weighted average grant- date fair value |
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|
Outstanding as of January 1, 2011 |
4,682,000 | $ | 5.85 | |||||
|
Granted |
410,000 | 11.20 | ||||||
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Vested |
(1,612,000 | ) | 5.69 | |||||
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Forfeited |
(200,000 | ) | 6.77 | |||||
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|
Outstanding as of December 31, 2011 |
3,280,000 | $ | 6.54 | |||||
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Nonvested shares |
Shares | Weighted average grant- date fair value |
||||||
|
Outstanding as of January 1, 2010 |
4,700,000 | $ | 5.55 | |||||
|
Granted |
530,000 | 8.14 | ||||||
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Vested |
(218,000 | ) | 5.16 | |||||
|
Forfeited |
(330,000 | ) | 5.77 | |||||
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|
Outstanding as of December 31, 2010 |
4,682,000 | $ | 5.85 | |||||
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Reconciliation |
2011 | 2010 | 2009 | |||||||||
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Basic-weighted average shares outstanding |
295,053,790 | 294,861,424 | 296,715,970 | |||||||||
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Weighted shares assumed upon exercise of stock options |
814,936 | 0 | 0 | |||||||||
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Diluted-weighted average shares outstanding |
295,868,726 | 294,861,424 | 296,715,970 | |||||||||
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Summary of anti-dilutive options excluded |
2011 | 2010 | 2009 | |||||||||
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Options to purchase shares of common stock |
704,384 | 5,328,246 | 5,255,120 | |||||||||
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Weighted-average exercise prices of options |
$ | 32.05 | 23.94 | 23.57 | ||||||||
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| 2011 | 2010 | 2009 | ||||||||||
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Domestic |
$ | 545,527 | 409,068 | 296,227 | ||||||||
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Foreign |
29,554 | 21,572 | 1,263 | |||||||||
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| $ | 575,081 | 430,640 | 297,490 | |||||||||
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2011 : |
Current | Deferred | Total | |||||||||
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Federal |
$ | 164,125 | 17,343 | 181,468 | ||||||||
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State |
28,669 | (244 | ) | 28,425 | ||||||||
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Foreign |
8,683 | (1,424 | ) | 7,259 | ||||||||
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| $ | 201,477 | 15,675 | 217,152 | |||||||||
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2010 : |
Current | Deferred | Total | |||||||||
|
Federal |
$ | 136,247 | (936 | ) | 135,311 | |||||||
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State |
22,914 | (492 | ) | 22,422 | ||||||||
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Foreign |
4,448 | 3,103 | 7,551 | |||||||||
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| $ | 163,609 | 1,675 | 165,284 | |||||||||
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2009 : |
Current | Deferred | Total | |||||||||
|
Federal |
$ | 93,469 | 4,855 | 98,324 | ||||||||
|
State |
13,733 | 698 | 14,431 | |||||||||
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Foreign |
1,210 | (832 | ) | 378 | ||||||||
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| $ | 108,412 | 4,721 | 113,133 | |||||||||
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| 2011 | 2010 | 2009 | ||||||||||
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Federal income tax expense at the 'expected' rate of 35% |
$ | 201,278 | 150,724 | 104,122 | ||||||||
|
Increase (decrease) attributed to: |
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|
State income taxes, net of federal benefit |
18,210 | 14,259 | 9,650 | |||||||||
|
State tax matters |
737 | 1,238 | 785 | |||||||||
|
Other, net |
(3,073 | ) | (937 | ) | (1,424 | ) | ||||||
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|
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|
Total income tax expense |
$ | 217,152 | 165,284 | 113,133 | ||||||||
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| 2011 | 2010 | |||||||
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Deferred income tax asset (liability): |
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|
Inventory costing and valuation methods |
$ | 4,643 | 4,689 | |||||
|
Allowance for doubtful accounts receivable |
2,202 | 1,836 | ||||||
|
Insurance claims payable |
10,807 | 9,486 | ||||||
|
Promotions payable |
797 | 456 | ||||||
|
Accrued legal reserves |
39 | 2,458 | ||||||
|
Stock based compensation |
5,853 | 5,218 | ||||||
|
Federal and state benefit of uncertain tax positions |
1,632 | 1,253 | ||||||
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Other, net |
920 | 379 | ||||||
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|
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Total deferred income tax assets |
26,893 | 25,775 | ||||||
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|
Fixed assets |
(48,329 | ) | (31,464 | ) | ||||
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|
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Total deferred income tax liabilities |
(48,329 | ) | (31,464 | ) | ||||
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|
|
|
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|
Net deferred income tax asset (liability) |
$ | (21,436 | ) | (5,689 | ) | |||
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| 2011 | 2010 | |||||||
|
Balance at January 1, |
$ | 3,617 | 1,605 | |||||
|
Increase related to prior year tax positions |
578 | 1,666 | ||||||
|
Decrease related to prior year tax positions |
(65 | ) | (111 | ) | ||||
|
Increase related to current year tax positions |
523 | 457 | ||||||
|
Decrease related to statute of limitation lapses |
0 | 0 | ||||||
|
Settlements |
0 | 0 | ||||||
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|
|
|
|||||
|
Balance at December 31, |
$ | 4,653 | 3,617 | |||||
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Revenues |
2011 | 2010 | 2009 | |||||||||
|
United States |
$ | 2,474,805 | 2,067,860 | 1,769,938 | ||||||||
|
Canada |
198,592 | 145,078 | 115,323 | |||||||||
|
Other foreign countries |
93,462 | 56,533 | 45,069 | |||||||||
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|||||||
| $ | 2,766,859 | 2,269,471 | 1,930,330 | |||||||||
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Long-Lived Assets |
2011 | 2010 | 2009 | |||||||||
|
United States |
$ | 426,329 | 361,083 | 324,701 | ||||||||
|
Canada |
11,105 | 9,536 | 8,947 | |||||||||
|
Other foreign countries |
11,376 | 6,814 | 5,108 | |||||||||
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| $ | 448,810 | 377,433 | 338,756 | |||||||||
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| Leased facilities |
Leased vehicles |
Total | ||||||||||
|
2012 |
$ | 84,519 | 17,330 | 101,849 | ||||||||
|
2013 |
62,386 | 9,079 | 71,465 | |||||||||
|
2014 |
40,795 | 4,126 | 44,921 | |||||||||
|
2015 |
24,683 | 0 | 24,683 | |||||||||
|
2016 |
10,687 | 0 | 10,687 | |||||||||
|
2017 and thereafter |
0 | 0 | 0 | |||||||||
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|
|||||||
| $ | 223,070 | 30,535 | 253,605 | |||||||||
|
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|||||||
| Leased facilities |
Leased vehicles |
Total | ||||||||||
|
2011 |
$ | 95,808 | 23,866 | 119,674 | ||||||||
|
2010 |
$ | 92,854 | 21,540 | 114,394 | ||||||||
|
2009 |
$ | 91,270 | 26,295 | 117,565 | ||||||||
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|
Type |
Introduced | 2011 | 2010 | 2009 | ||||||||||||
|
Fasteners1 |
1967 | 46.9 | % | 49.1 | % | 50.0 | % | |||||||||
|
Tools |
1993 | 9.4 | % | 9.3 | % | 9.9 | % | |||||||||
|
Cutting tools |
1996 | 4.6 | % | 4.4 | % | 4.4 | % | |||||||||
|
Hydraulics & pneumatics |
1996 | 7.8 | % | 7.2 | % | 6.9 | % | |||||||||
|
Material handling |
1996 | 6.1 | % | 6.1 | % | 5.9 | % | |||||||||
|
Janitorial supplies |
1996 | 6.2 | % | 6.1 | % | 6.1 | % | |||||||||
|
Electrical supplies |
1997 | 4.7 | % | 4.6 | % | 4.4 | % | |||||||||
|
Welding supplies |
1997 | 3.9 | % | 3.6 | % | 3.6 | % | |||||||||
|
Safety supplies |
1999 | 7.9 | % | 7.0 | % | 6.3 | % | |||||||||
|
Metals |
2001 | 0.5 | % | 0.5 | % | 0.6 | % | |||||||||
|
Direct ship2 |
2004 | 1.6 | % | 1.6 | % | 1.8 | % | |||||||||
|
Office supplies |
2010 | |||||||||||||||