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Fastenal Company Reports 2010 Third Quarter Earnings

Operating and administrative expenses improved relative to sales in the third quarter of 2010 versus the third quarter of 2009. Sales grew 23.4% for the quarter; employee related expenses grew 26.3% and all other expenses contracted 5.1%. 

Historically, 65% to 70% of our operating and administrative expenses consist of employee related costs. The components are: (1) payroll (which includes cash compensation, stock option expense, and profit sharing), (2) health care, and (3) education. During the first quarter of 2010 and all four quarters of 2009, this range had reduced to 60% to 65% due to the factors noted below. During the second and third quarters of 2010, this range moved back to the historical level.

The payroll cost component for the third quarter of 2010 increased 29.2% from the same quarter in 2009 and increased 7.0% from the second quarter of 2010. The disparity between the full-time equivalent headcount increase of 6.4% noted earlier and the 29.2% annual increase is driven by several factors: (1) the sales commissions earned grew (this increase was amplified by the sales growth and the gross margin expansion, both of which have a meaningful impact on the commissions earned), (2) the total bonuses earned increased due to our profit growth, (3) the hours worked per employee grew, and (4) our profit sharing contribution grew. These four items, when compared to the same quarter in 2009, all grew at a rate faster than the rate of sales growth.

Our health care costs in the third quarter of 2010 decreased from the third quarter of 2009, but increased for the nine-month period. Health care costs in 2009 and the first quarter of 2010 increased due to the increase in the percentage of employees opting for expanded coverage as their spouses lost their insurance coverage at other employers, increases in COBRA costs due to changes in federal funding within COBRA, and an increase in health care utilization when compared to previous years. These conditions still exist in the second and third quarters of 2010; however, the spike in costs in the second and third quarters of 2009 changed the comparison. On a two year basis, our health care costs are still up significantly despite a decrease in headcount.

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