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Fastenal Company Reports 2012 Fourth Quarter And Annual Earnings

Our non-residential construction customers have historically represented 20% to 25% of our business. The daily sales to these customers grew or contracted in the first, second, third, and fourth quarters (when compared to the same quarter in the previous year), and for the year, as follows:

  Q1 Q2 Q3 Q4 Annual
2012 17.1% 12.7% 8.2% 4.2% 10.3%
2011 17.7% 15.8% 15.8% 17.4% 17.1%
2010 -14.7% 0.5% 6.3% 10.3% -0.3%

We believe the weakness in the economy in the fourth quarter of 2012, particularly in the non-residential construction market, was amplified by the political uncertainty in the United States.

A graph of the sequential daily sales trends to these two end markets in 2012, 2011, and 2010, starting with a base of '100' in the previous October and ending with the next October, would be as follows:  http://media.globenewswire.com/cache/11647/file/17611.pdf

GROWTH DRIVERS OF OUR BUSINESS

We grow by continuously adding customers and by increasing the activity with each customer. We believe this growth is enhanced by our close proximity to our customers, which 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, but expanded beyond the United States beginning in the mid 1990's. 

In our first ten years of being public (1987 to 1997), we opened stores at a rate approaching 30% per year.  In the next ten years, we opened stores at an annual rate of approximately 10% to 15% and, over the last five years, at a rate of approximately 3% to 8% (we currently expect to open approximately 65 to 80 stores in 2013, or approximately 2.5% to 3.0%). As we gained proximity to more customers, we continued to diversify our growth drivers. This was done to provide existing store personnel with more tools to grow their business organically, and the results of this are reflected in our earlier discussion on sales growth at stores opened greater than five years. In the early 1990's, we began to expand our product lines, and we added new product knowledge to our bench. 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) specific products (most recently metal working), and (5) FAST Solutions SM (industrial vending). Another step occurred at our sales locations (this includes Fastenal stores as well as strategic account stores and in-plant locations) and at our distribution centers, and began with a targeted merchandising and inventory placement strategy that included our 'Customer Service Project' approximately ten years ago and our 'Master Stocking Hub' initiative approximately five years ago. This strategy 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.

Our FAST Solutions SM (industrial vending) operation is a rapidly expanding component of our business. We believe industrial vending is the next logical chapter in the Fastenal story; we also believe it has the potential to be transformative to industrial distribution, and that we have a 'first mover' advantage. We are investing aggressively to maximize this advantage. At our investor day in May 2011, we discussed our progress with industrial vending. In addition to our discussion regarding progress, we discussed our goals with the rollout of the industrial vending machines. One of the goals we identified related to our rate of 'machine signings' (the first category below) – our goal was simple, sign 2,500+ machines per quarter (or an annualized run rate of 10,000 machines). In 2012, we hit our annual goal of 10,000 machines during July, and the momentum has continued as we finished the year. We intend to continue our aggressive push with FAST Solutions SM (industrial vending) and, to this end, have established an internal goal to sign 30,000 machines in 2013, or 2,500 per month rather than per quarter. This is an aggressive goal, but we believe we can hit this run rate during 2013. In addition, during 2012 we developed plans to (1) reinvigorate our fastener growth and to (2) improve the performance (i.e. sales growth) at under-performing locations. These plans centered on expanding our sales team for industrial production business, improving our delivery systems for other fastener business, and expanding the team that supports under-performing stores and districts. 

The following table includes some statistics regarding our industrial vending business (note - we added the third category of information this quarter to highlight the mix change in the machines deployed as our business expands beyond the flagship FAST 5000 machine):

    Q1 Q2 Q3 Q4 Annual
Number of vending machines in  2012 4,568 4,669 5,334 5,591 20,162
 contracts signed during the period 1 2011 1,405 2,107 2,246 2,084 7,842
  2010 257 420 440 792 1,909
Cumulative machines installed 2 2012 9,798 13,036 17,013 21,095  
  2011 2,659 3,867 5,642 7,453  
  2010 892 1,184 1,515 1,925  
Percent of installed machines that are a FAST 5000 2012 69.7% 65.9% 60.6% 58.0%  
 (our most common helix vending machine) 2011 82.6% 77.5% 75.0% 72.5%  
  2010 99.5% 97.3% 92.4% 87.8%  
Percent of total net sales to  2012 17.8% 20.8% 23.2% 25.8%  
 customers with vending machines 3 2011 8.9% 10.5% 13.1% 15.7%  
  2010 3.4% 4.6% 6.1% 7.5%  
Daily sales growth to customers 2012 33.9% 34.3% 32.9% 28.6%  
 with vending machines 4 2011 50.6% 43.9% 42.5% 40.7%  
  2010 37.4% 54.0% 56.4% 60.2%  
  1 This represents the gross number of machines signed during the quarter, not the number of contracts.
  2 This represents the number of machines installed and dispensing product on the last day of the quarter.
  3 The percentage of total sales (vended and traditional) to customers currently using a vending solution.
  4 The growth in total sales (vended and traditional) to customers currently using a vending solution compared to the comparable period in the preceding year.

PROFIT DRIVERS OF OUR BUSINESS

We grow our profits by continuously working to grow sales and to improve our relative profitability. 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. 

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