What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-07 compared with 2021-02-08 · 234 added, 177 removed, 377 unchanged (52% of the section changed)

3 unchanged sentences

Discussions of 2019 items and year-to-date comparisons between 2020 and 2019 that are not included in this Form 10-K, can be found in 'Management's Discussion and Analysis of Financial Condition and Results of Operations' in Part II, Item 7 of our annual report on Form 10-K for the fiscal year ended December 31, 2020.

Italicized discussions throughout Item 7 of this Form 10-K indicate discussions of financial condition and results of operations in 2020.

Business and Operational Overview

13 unchanged sentences

(5) We believe the markets are efficient.

To us, this means we can grow our market share if we provide the greatest value to our customer.

Our approach to addressing these aspects of our marketplace is captured in our motto Growth through Customer Service .

In our view, this means that companies that grow market share are those that develop differentiated capabilities that provide the greatest value to the customer.

Our approach to addressing these aspects of our marketplace is captured in our motto Where Industry Meets Innovation ™ .

The concept of growth is simple:

1 unchanged sentence

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 our customer-facing resources to operate efficiently and to help identify new business solutions.

Fourth, we strive to generate strong profits, which produce the cash flow necessary to fund our growth and to support the needs of our customers.

Lastly, we identify drivers that allow us to get closer to our customers and gain market share.

We believe our ability to grow is amplified if we can serve our customers at the closest economic point of contact.

At one point, the closest economic point of contact was the local branch.

Today, in many cases, we have moved the branch inside the customers' facility.

We also are frequently positioned right at the point of consumption within customers' facilities through our suite of FMI devices and capabilities.

Therefore, our focus centers on understanding our customers' day, their opportunities, and their obstacles.

First, we recruit service-minded individuals to support customers and empower them to operate in a decentralized fashion to maximize their flexibility to solve customer problems.

We support these customer-facing resources with a supply chain capability that is speedy, efficient, and cost-effective.

This has formed the foundation of our high-touch model since inception.

Second, we invest in, develop, and deploy capabilities that allow us to illuminate and provide greater control over a customer's supply chain.

These capabilities range from service models that take advantage of our local presence and/or our ability to more efficiently manage complex procurement needs, to hardware and software technologies that promote actionable data capture, improve operating efficiencies and reduce supply chain risk.

Third, we strive to generate strong profits, which produce the cash flow necessary to support our growth, our product and technology development, and the needs of our customers.

The ultimate aim of this 'high-tech, high-touch' approach to gaining market share is to allow us to get closer to our customers, going so far as to be right to the point of consumption within customers' facilities.

Marrying our presence, capabilities and technologies deepens our relationships and our understanding of our customers' day-to-day opportunities and obstacles.

This, in turn, enhances our ability to provide innovative and comprehensive solutions to our customers' challenges.

By doing these things every day, Fastenal remains a growth-centric organization.

5 unchanged sentences

This effect was illustrated by a significant increase in sales for our safety products.

During that period, improved sales of PPE and sanitation products more than offset the general economic weakness.

During that period, improved sales of PPE and sanitation products

more than offset the general economic weakness.

These dynamics affected our business throughout the second quarter of 2020, but the effects were greatest in April, with sequential improvements in May and June as business restrictions gradually eased.

3 unchanged sentences

This improved the outlook of the manufacturing and construction customers that support our traditional branch and Onsite business and moderated the level of demand for PPE and sanitation products that we experienced at the onset of the pandemic.

believe that the sequential gains in economic activity that we experienced in the latter part of the second quarter of 2020 continued through the third and fourth quarters of 2020, although the rate of improvement remains gradual.

Consistent with broader social trends, we have taken steps to safeguard the health of our employees.

This includes closing branch and corporate facilities to outside personnel, adjusting work schedules to maximize social distance, creating space between work areas, providing ample PPE and cleaning supplies, having formal policies for mitigation in the event of cases of illness, utilizing technologies where work duties allow to enable work from home capabilities, and utilizing technologies such as vending and mobility to create social distancing.

Due to these precautions, our operations have continued to function effectively, including our internal controls over financial reporting.

While there are exceptions, our customers have largely continued to operate their businesses despite a continued high rate of viral infections that exist as of this date, in contrast to the second quarter of 2020 when many temporarily suspended operations.

Still, there remains significant uncertainty concerning the magnitude of the impact and duration of the COVID-19 pandemic.

Factors deriving from the COVID-19 response that have or may negatively impact sales and gross margin in the future include, but are not limited to:

limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments;

The sequential gains in economic activity that we experienced in the latter part of the second quarter of 2020 continued through the third and fourth quarters of 2020.

In 2021, we saw several distinct business patterns, which mostly persisted throughout the period.

First, economic normalization continued, resulting in strong demand from our traditional manufacturing and non-residential construction customers.

Second, the pandemic continued, with ebbs and flows in infections during the year.

This resulted in businesses, including Fastenal, continuing to take steps to promote workforce and customer health and safety.

However, in contrast to the early part of 2020, the pandemic was not primarily responsible for plant shutdowns or production cuts;

companies navigated the pandemic mostly without curtailing operations.

Third, this combination of strong demand coupled with ongoing adaptations to the pandemic resulted in a number of stresses accompanying economic growth:

supply chain disruption, labor force constraints, and product and shipping inflation.

As a result, while the economic backdrop was solid throughout 2021, satisfying customer demand was challenged by difficulty in procuring materials, retaining sufficient part- and full-time labor to service existing customers and acquire new ones, and offsetting inflation.

We exited 2021 with each of those dynamics still largely intact.

At the height of the pandemic, and consistent with broader social trends, we took steps to safeguard the health of our employees and customers.

This included closing facilities to outside personnel, adjusting work schedules, spaces and technologies to allow for social distancing, providing ample PPE and cleaning supplies, and having formal mitigation policies in the event of infection.

These precautions allowed our operations to continue to function effectively.

At the end of 2021, our operations were operating mostly normally, although we continue to practice social distancing within our facilities, make PPE and cleaning supplies available, and follow our mitigation policies when an infection is identified.

The pandemic has not precipitated any issues with our internal controls, financial health, or liquidity, with substantially all of our $700.0 bank revolver available for use.

There remains significant uncertainty concerning the duration of the COVID-19 pandemic as well as the severity of any future infection surges.

As a result, future events deriving from COVID-19 may negatively impact sales and gross margin due to, among other things:

limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell;

an inability to meet delivery requirements and commitments;

limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home;

2 unchanged sentences

and limitations on the ability of our customers to pay us on a timely basis.

With respect to liquidity, as of the end of 2020, we have substantially all of our $700.0 bank revolver available for use in the event that the need arises.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and shareholders.

2 unchanged sentences

Net s ales increased $363.4, or 6.4%, in 2021 relative to 2020.

Our gross profit increased $52.3, or 2.1%, in 2020 relative to 2019, and as a percentage of net sales declined to 45.5% in 2020 from 47.2% in 2019.

Our gross profit increased $209.5, or 8.2%, in 2021 relative to 2020, and as a percentage of net sales increased to 46.2% in 2021 from 45.5% in 2020.

Our operating income increased $75.6, or 6.6%, in 2021 relative to 2020, and as a percentage of net sales increased to 20.3% in 2021 from 20.2% in 2020.

1 unchanged sentence

Our diluted net earnings per share were $1.60 in 2021 compared to $1.49 in 2020, an increase of 7.4%.

Although we continued to market our growth drivers in 2020, COVID-19 created an environment that was not conducive to the level of signings we would have expected under normal business conditions.

At the same time, significant resources shifted to focus on rapidly and efficiently securing, transporting, and providing PPE to new and existing customers that found themselves managing short-term crisis conditions brought on by the pandemic.

These dynamics produced signi ngs of just 223 new On site customer loca tions and 16,417 new industrial vending devices in 2020.

Those same dynamics also produced very strong daily sales growth of 51.0% in our safety product line and 129.7% from government and healthcare customers in the period, which more than offset the low growth driver signings and weak activity in our traditional manufacturing and construction customer base.

The year 2021 was marked by a number of trends.

Favorably, we experienced strong demand from our traditional manufacturing and non-residential construction customers.

Unfavorably, we experienced disruption in supply chains and labor markets, exacerbated by periodic surges in COVID-19 infections, as well as significant inflation in product and transportation costs.

While these variables do present challenges with respect to having sufficient product availability, and cost of service, at this point the impact of COVID-19 is primarily indirect through its influence on cyclical factors.

The primary exception is in our ability to market our growth drivers, as many of our customers were focused on short-term crisis management over long-term strategic planning.

As a result, the environment was not conducive to achieving the level of signings we would have

expected under normal business conditions.

These dynamics produced signings of 274 new Onsite customer locations and 19,311 weighted FASTBin/FASTVend signings in 2021.

The table below summarizes our absolute and full-time equivalent (FTE;

based on 40 hours per week) employee headcount, our investments in in-market locations (defined as the sum of the total number of public branch locations and the total number of active Onsite locations), and industrial vending devices at the end of the periods presented and the percentage change compared to the end of the prior period.

based on 40 hours per week) employee headcount, our investments in in-market locations (defined as the sum of the total number of branch locations and the total number of active Onsite locations), and weighted FMI at the end of the periods presented and the percentage change compared to the end of the prior period.

2020 Twelve-month

4 unchanged sentences

Total FTE employee headcount 18,370 17,836 3.0 %

Number of public branch locations 2,003 2,114 -5.3 %

Number of branch locations 1,793 2,003 -10.5 %

Number of active Onsite locations 1,416 1,265 11.9 %

Number of in-market locations 3,209 3,268 -1.8 %

Ratio of in-market location FTE headcount to in-market locations 3:1 4:1

Industrial vending devices (installed count) (1)

Weighted FMI devices (MEU installed count) (1)

92,874 83,951 10.6 %

Ratio of industrial vending devices to in-market locations 29:1 28:1

(1) This number primarily represents devices which principally dispense product and produce product revenues, and excludes approximately 15,000 devices that are part of a locker lease program where the devices are principally used for the check-in/check-out of equipment.

During the last twelve months, we reduced our total FTE employee headcount by 1,132.

This reflects a decline in our in-market FTE employee headcount of 976, as well as declines in headcount at our distribution centers and manufacturing operations.

These reductions are primarily related to efforts to manage expenses in response to weaker demand from traditional manufacturing and construction customers resulting from the COVID-19 pandemic.

This was only partly offset by additions in non-branch selling and support roles.

The latter most significantly reflects an increase in personnel in Information Technology, which includes the addition of employees from our acquisition of certain assets of Apex, as well as roles to support customer acquisition and implementation, particularly as it relates to our growth drivers and to support general corporate functions.

We opened twelve branches and closed 123 branches, net of conversions, in 2020.

We activated 257 Onsite locations and closed 106, net of conversions, in 2020.

The number of closings reflects both normal churn in our business, whether due to redefining or exiting customer relationships, the shutting or relocation of a customer facility, or a customer decision, as well as our ongoing review of underperforming locations.

Our in-market network forms the foundation of our business strategy, and we will continue to open or close locations as is deemed necessary to sustain and improve our network, support our growth drivers, and manage our operating expenses.

(1) This number excludes approximately 12,000 non-weighted devices that are part of our locker lease program.

During the last twelve months, we increased o ur total FTE employee headc ount by 534.

This reflects an increase in our in-market and non-in-market selling FTE employee headcount of 230 to support growth in the marketplace and sales initiatives targeting customer acquisition.

We had an increase in our distribution center FTE employee headcount of 149 to support increasing product throughput at our facilities and to expand our local inventory fulfillment terminals (LIFTs).

We had an increase in our remaining FTE employee headcount of 155 that relates primarily to personnel investments in information technology and operational support, such as purchasing and product development.

We opened two branches in the fourth quarter of 2021 and closed 68 branches, net of conversions.

We activated 65 Onsite locations in the fourth quarter of 2021 and closed 16, net of conversions.

In 2021, we opened ten branches and closed 220, net of conversions.

In 2021, we activated 242 Onsite locations and closed 91, net of conversions.

In any period, the number of closings tend to reflect both normal churn in our business, whether due to redefinin g or exiting customer relationships, the shutting or relocation of customer facilities that host our locations, or a customer decision, as well as our ongoing review of underperforming locations.

Our in-market n etwork forms the foundation of our business strategy, and we will continue to open or close locations as is deemed necessary to sustain and improve our network, support our growth drivers, and manage our operating expenses.

Results of Operations

4 unchanged sentences

Operating and administrative expenses 26.0 % 25.3 % 27.3 %

Gain on sale of property and equipment 0.0 % 0.0 % 0.0 %

Operating income 20.3 % 20.2 % 19.8 %

12 unchanged sentences

Daily sales impact of acquisitions 0.0 % 0.0 % 0.1 %

The increase in net sales noted above for 2020 was a function primarily of higher unit sales for safety products, specifically pandemic-related sales of PPE.

The effect of higher prices during the period were not material.

The increase in net sales noted above for 2019 was a result of higher unit sales and, to a lesser degree, higher prices.

Higher product prices in 2019 were a result of actions taken to offset increases in product costs, and we believe these increases contributed 0.9% to 1.0% to sales growth during 2019.

The increase in net sales noted above for 2021 was due to higher unit sales of industrial products to traditional manufacturing and construction customers and higher pricing, only partly offset by lower pandemic-related PPE sales as the prior year's demand surge did not recur.

Higher unit sales in 2021 were a result of strong economic activity which increased demand for our products to our traditional manufacturing and construction customers.

Although economic strength was fairly consistent throughout the year, our growth patterns were not, primarily due to comparisons related to the timing of pandemic-related PPE sales in the previous year.

For instance, our daily sales growth in the first half of 2021 was 2.5%.

Our cyclical product categories substantially outperformed this, as exemplified by fastener daily sales growth of 15.4% in the first half of 2021.

However, this was mostly offset by the absence of significant spending for PPE that occurred in the previous period, which is best illustrated by safety products' daily sales decline of 20.2% in first half of 2021.

By contrast, our daily sales growth in the second half of 2021 was a much stronger 12.3%.

Our cyclical product categories continued to outperform with fastener daily sales having grown 22.2% in the second half of 2021.

While certain products and markets within our business continued to face difficult PPE comparisons, they were not as severe as what had been experienced in the first half of 2021, which allowed our safety products to post daily growth of 0.3% in the second half of 2021.

Our growth drivers also returned to contributing meaningfully to higher unit sales in 2021, due to strong business activity within our customer base and, to a lesser degree, a higher installed base of FMI devices.

Our number of active Onsites increased 11.9%, for instance, while Onsite daily sales growth was 20.6%.

Similarly, our installed base of FMI MEUs increased 10.6%, while FMI daily sales growth was 41.0%.

While demand was strong throughout 2021, the year experienced certain disruptions.

The first were supply chain constraints, as the rapid recovery in demand resulted in shortages in production and shipping capacity.

The second was labor shortages, which were particularly acute in the market for part-time employees.

The third was the ongoing COVID-19 pandemic, which continued to produce periodic surges in infection rates.

While businesses largely managed through these events as opposed to stopping production, the instability it created in worker availability exacerbated the pre-existing supply chain and labor challenges.

The fourth was inflation in material costs, overseas and domestic transportation expenses, and labor wage rates.

We believe the most significant impact of these disruptions was on our growth driver signings.

We signed 274 Onsites in 2021, above the prior year (223 signings) but well below our goal at the start of 2021 of 375 to 400 units.

Similarly, we signed 19,311 FMI MEUs, above the prior year (16,503 MEUs), but well below our goal at the start of the year of 23,000 to 25,000 MEUs.

We believe many of our customers were diverting significant energy to managing the effects of supply chain, labor, COVID-19, and inflation in the short term, and it lengthened the sales cycle for our supply chain solutions.

Price contributed 200 to 230 basis points to our net sales growth in 2021.

We instituted a number of pricing events during 2021 as a means of mitigating rising product and transportation costs.

As these events fell more heavily into the second half of the year, price contributed an increasing amount through the period, with price in the fourth quarter of 2021 contributing 440 to 470 basis points to net sales growth.

Higher unit sales in 2020 were heavily influenced by actions taken by governments and businesses around the world to address COVID-19, which influenced the period in a couple of ways.

1 unchanged sentence

This generated significant PPE sales through the year.

We believe the best proxies for this trend was daily sales growth of our safety products of 51.0% an d daily sales growth to our government and healthcare customers o f 129.7%.

Se cond, we managed the effects of business closures, disruption in labor forces and supply chains, and a reduction in general business activity that was a by-product of the responses of governments and businesses to the pandemic.

We believe the best proxies for this trend was daily sales growth of our safety products of 51.0% and daily sales growth to our government and healthcare customers of 129.7%.

Second, we managed the effects of business closures, disruption in labor forces and supply chains, and a reduction in general business activity that was a by-product of the responses of governments and businesses to the pandemic.

The impact of this is best illustrated by several metrics.

For instance, United States Industrial Production, which is published by the Federal Reserv e, decreased 7.1% in 2020.

Based on the large proportion of our sales that are derived from the United States, we believe United States Industrial Production is a good proxy for the state of our marketplace and that the significant dec line in this metric is consistent with the weakness we experienced in our traditional manufacturing and construction markets.

instance, United States Industrial Production, which is published by the Federal Reserve, decreased 7.1% in 2020.

Based on the large proportion of our sales that are derived from the United States, we believe United States Industrial Production is a good proxy for the state of our marketplace and that the significant decline in this metric is consistent with the weakness we experienced in our traditional manufacturing and construction markets.

This was also reflected in the daily sales of fasteners, which is our most cyclical product line.

Daily sales of fasteners d eclined 7.2% in 202 0.

Daily sales of fasteners declined 7.2% in 2020.

Although traditional manufacturing and construction business activity has gradually, but steadily, improved from depressed second quarter of 2020 levels, it did remain negative through the year.

8 unchanged sentences

We did experience growth in our National Account customers of 6.7% in 2020 compared to 2019, though this was due to the sale of PPE to customers navigating the challenges of operating during a pandemic.

The higher unit sales in 2019 resulted primarily from two sources.

First was higher underlying market demand, as illustrated by U.S.

Industrial Production, which increased 0.8% in 2019, and daily sales of fasteners, which grew 5.5% in 2019.

It is notable, however, that underlying demand in 2019 began strong but weakened throughout the year.

Referring again to U.S.

Industrial Production, it increased 2.9% in the first quarter of 2019 but decreased 0.9% in the fourth quarter of 2019.

The slowing in these metrics from the start to the end of 2019 mirrored the slowing growth we experienced in our unit sales over the same period.

A relatively greater contributor to our growth in 2019 was the success of our growth initiatives.

We signed 21,857 industrial vending devices during 2019.

While this represented a slight decrease in signings of 1.0% from 2018, it also contributed to growth in our installed base to 89,937 vending devices at the end of 2019, an increase of 10.8% over 2018.

Growth in our installed base was primarily responsible for sales growth through our vending devices in the mid-teens during 2019.

We signed 362 new Onsite locations in 2019, an increase of 7.7% over 2018, and had 1,114 active sites on December 31, 2019, an increase

of 24.6% over December 31, 2018.

Growth in our number of active sites was primarily responsible for sales growth through our Onsites in the mid-teens during 2019.

The contribution of new national account contracts and strong penetration of existing national account customers resulted in daily sales from our national account customers growing 11.9% in 2019 compared to 2018.

Sales by Product Line

4 unchanged sentences

Other product lines 45.5% 44.6% 47.9%

The shifts in product mix over the last two years reflect the impact of the pandemic.

In 2020, actions taken by governments and businesses to address COVID-19 caused a significant decline in economic activity that produced sales declines in our cyclical products, such as fasteners, but increased demand for PPE and produced sales growth in our safety products.

The effect was to reduce our mix of sales coming from fasteners and other product lines while increasing the mix of sales coming from safety products.

In 2021, these dynamics reversed with economic recovery generating strong growth in our cyclical product lines while the absence of surge sales and stabilization in the supply chain for PPE restrained growth in safety products.

The effect was to increase our mix of sales coming from fasteners and other product lines while reducing the mix of sales coming from safety products.

Our product categories did not fully revert to pre-pandemic levels in 2021, as our mix of safety products in 2021 of 21.2% remained meaningfully above our mix of safety products in 2019 of 17.9%.

In the short term, the pandemic has created heightened safety and sanitation protocols relative to the pre-pandemic period, and the increased use of related products as a result has increased our mix of safety products sales.

Shifts in product mix in 2020 largely reflects the factors that impacted our sales growth in the period.

Specifically, strong demand for PPE generated strong sales growth in our safety products, while weak trends in underlying conditions affected our traditional manufacturing and construction customers resulting in a sales decline in our fastener products.

The effect on other products was relatively muted, as certain lines benefited from pandemic-related demand (such as janitorial products), while others were negatively impacted by underlying demand (such as metalcutting and material handling).

Shifts in product mix in 2019 were based on more traditional factors.

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 impacted 2019 and will continue to promote a lower mix of fasteners in our total sales over time.

Second, the weakening industrial production environment had a disproportionately negative effect on fastener sales, particularly OEM fasteners sales, relative to non-fastener sales (which relates more to plant operations than production).

This weakness is more of a cyclical factor than a structural one, and as such was relevant in 2020 (albeit overwhelmed by pandemic-related effects) and 2019.

Annual Sales Changes, Sequential Trends, and End Market Performance

4 unchanged sentences

Annual Sales Changes, by Month

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):

During the months noted below, all of our selling locations, when combined, had daily sales growth (contraction) rates of (compared to the same month in the preceding year):

May June July Aug.

8 unchanged sentences

They generally relate to months where certain holidays impair business days and/or seasons impact certain end markets, particularly non-residential construction.

The first landing centers on Easter and the Good Friday holiday that precedes it, which alternates between March and April (Good Friday occurred in April in 2020 and 2019, occurred in March during 2018, and will fall in April in 2021), the second landing centers on July 4th, and the third landing centers on the approach of winter with its seasonal impact on primarily our non-residential construction business and with the Christmas/New Year holidays.

The first landing centers on Easter and the Good Friday holiday that precedes it, which in any given year can fall in March or April, the second landing centers on July 4th, and the third landing centers on the approach of winter with its seasonal impact on primarily our non-residential 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.

1 unchanged sentence

The line labeled 'Benchmark' is a historical average of our sequential daily sales change for the trailing five year average (2015-2019).

We have excluded 2020 from the average as the effects of the pandemic created unusual sequential patterns that we do not consider representative of normal trends.

We believe this time frame serves to show the historical pattern and could serve as a benchmark for current performance.

13 unchanged sentences

-1.0 % 1.2 % 3.1 % 0.1 % 1.7 % 1.8 % -3.4 % 3.3 % 2.2 % -2.5 % 7.5 %

2021 0.9 % -2.3 % 5.6 % -2.2 % 5.6 % 1.6 % -3.4 % 3.1 % 4.8 % 0.0 % 13.0 %

21Delta 1.9 % -3.5 % 2.5 % -2.3 % 3.9 % -0.2 % 0.0 % -0.2 % 2.6 % 2.5 % 5.5 %

4 unchanged sentences

(1) The January figures represent the percentage change from the previous October, whereas the remaining figures represent the percentage change from the previous month.

(2) The benchmark for each month is the average of the previous five years for that month (excluding the impact of the March 2017 Mansco acquisition).

Surge sales associated with COVID-19 make sequential averages in 2020 unrepresentative.

As a result, the 2021 benchmark uses a preceding five-year average that excludes 2020.

Note – Amounts may not foot due to rounding difference.

3 unchanged sentences

The daily sales growth (contraction) rates to these manufacturing customers, when compared to the same period in the prior year, were as follows:

Q1 Q2 Q3 Q4 Annual

Daily sales growth - manufacturing customers Q1 Q2 Q3 Q4 Annual

2021 5.6 % 24.5 % 20.8 % 23.8 % 18.4 %

7 unchanged sentences

this information includes all end markets):

Q1 Q2 Q3 Q4 Annual

Daily sales growth - fasteners Q1 Q2 Q3 Q4 Annual

2021 4.0 % 28.4 % 20.2 % 24.2 % 18.8 %

1 unchanged sentence

2019 11.8 % 5.5 % 3.0 % 1.8 % 5.5 %

The daily sales growth (contraction) rates of fasteners noted in the table above for first quarter of 2018, include 3.7 percentage points attributable to Mansco (acquired on March 31, 2017).

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.

1 unchanged sentence

this information includes all end markets):

Q1 Q2 Q3 Q4 Annual

Daily sales growth - non-fasteners Q1 Q2 Q3 Q4 Annual

2021 6.1 % -10.8 % 5.1 % 9.6 % 1.9 %

1 unchanged sentence

2019 12.7 % 9.5 % 8.0 % 5.1 % 8.8 %

Two product lines, safety and janitorial, accounted for approximately half of total non-fastener sales and saw a meaningful increase in sales in 2020 due to demand generated in response to the COVID-19 pandemic.

As a result, the change in our non-fastener lines in 2020 did not provide as much insight into the trends of our traditional manufacturing and construction customers as is typically the case.

Two product lines, safety and janitorial, accounted for approximately 44% of total non-fastener sales in 2021.

As previously disclosed, COVID-19 generated outsized growth in these two product categories in 2020 and the subsequent stabilization of the supply chain resulted in a reduction in orders and sales performance in 2021 that was well below what might normally be expected given the health of the industrial economy.

As a result, the change in our non-fastener lines in 2021 and 2020 did not provide as much insight into the trends of our traditional manufacturing and construction customers as is typically the case.

Still, we have sold non-fastener products through multiple cycles that do not include a pandemic and believe we can make several observations.

3 unchanged sentences

the non-fastener market is larger than the fastener market, we are underpenetrated in the non-fastener market relative to the fastener market, and industrial vending lends itself to sales of non-fastener products.

This is what we experienced in 2019.

The outperformance of our non-fastener business was far more dramatic in 2020 than can be explained by our traditional drivers of outperformance, and reflects the impact of COVID-19 on our sales of safety products, specifically PPE, and janitorial products, such as sanitizer and wipes.

Our non-residential construction and reseller customers have historically repres ented 20% to 25% of our business, though in 2020 it was slightly below the bottom of this range.

The daily sales growth (contraction) rates to t hese customers, when compared to the same period in the prior year, were as follows:

Q1 Q2 Q3 Q4 Annual

This dynamic is visible in 2019 results.

Our non-residential construction and reseller customers have historically represented 20% to 25% of our business, though in 2021 it was slightly below the bottom of this range as our industrial customers led our sales recovery.

The daily sales growth (contraction) rates to these customers, when compared to the same period in the prior year, were as follows:

Daily sales growth - non-residential construction and reseller customers Q1 Q2 Q3 Q4 Annual

2021 -6.7 % 3.5 % 7.0 % 10.3 % 3.3 %

2 unchanged sentences

Our non-residential construction and reseller business is heavily influenced by manufacturing, oil and gas, and infrastructure spending.

In 2021, improving economic business conditions, high prices for commodities such as metals and energy, and tightening facilities utilization produced improving growth rates throughout the year.

In 2020 and 2019, the poor and slowing production environment, respectively and as described above, and the accompanying worsening trends for commodities such as metals and energy, caused the growth in our non-residential construction and reseller customers to slow.

6 unchanged sentences

Our gross profit, as a percentage of net sales, was 46.2% in 2021 and 45.5% in 2020.

The gross profit percentage for 2020 decreased by 170 basis points based on three items.

The gross profit percentage for 2021 increased by 70 basis points based on higher product margins, primarily for safety products and overhead/organizational leverage related to higher volumes.

During 2021, our gross profit percentage increased when compared to the prior year.

This was largely due to three factors.

(1) We were able to leverage overhead/organizational expenses, absorbing certain fixed and period costs related to cyclical strength in our traditional manufacturing and construction markets.

(2) An improvement in product margins, particularly for safety products.

In response to the pandemic in 2020, we experienced a substantial surge in demand for COVID-related safety supplies, such that these products accounted for approximately 47% of total safety product sales in 2020, up from approximately 25% of total safety product sales in 2019.

As these products tended to carry a lower gross margin than non-COVID-related products, their substantial expansion in our safety product mix in 2020 caused a decline in the gross profit percentage of our safety product line.

In 2021, we experienced higher demand for non-COVID-related products as the industrial economy improved and lower demand for COVID-related products as the supply chain steadied.

This caused our mix of lower margin COVID-related products to decline to approximately 31% of total safety product sales, improving our overall safety product margin.

(3) Our net rebates were favorable.

As supply chains normalized and demand improved, we purchased more

products through our traditional partners increasing our supplier rebates.

At the same time, customer rebates moderated as spending from several key customers that purchased significant COVID-related products declined.

These variables were only partly offset by a $7.8 write-down of masks in the first quarter of 2021.

The impact of price/cost was neutral to 2021, as we were able to lift prices in response to higher costs for products and transportation services.

The net impact of product and customer mix was also neutral to 2021, as the benefit of relatively stronger fastener sales to product mix was negatively impacted by relatively stronger growth from larger and Onsite customers.

During 2020, our gross profit percentage decreased when compared to the prior year.

This decrease was primarily caused by three variables.

(1) A decline in product margin for safety and other products, which itself reflects several trends.

First, in th e second quarter of 2020 in order to procure supplies we utilized unfamiliar supply chains and prioritized speed of ac quisition over efficiency, resulting in lower margins.

First, in the second quarter of 2020 in order to procure supplies we utilized unfamiliar supply chains and prioritized speed of acquisition over efficiency, resulting in lower margins.

Second, in the third and fourth quarters of 2020 certain pandemic related products became oversupplied, and profits on our inventory fell (masks) while other products were in such short supply that cost rose (gloves).

We mitigated these effects as the year progressed, but did not eliminate them.

Third, mix within these categories was negative to margin, as in general COVID-related products had lower margins and increased in the mix.

Third, mix within these categories had a negative impact on margin, as in general COVID-related products had lower margins and increased in the mix.

(2) A change in product mix.

8 unchanged sentences

We successfully mitigated these challenges in 2020 by reducing movement and labor costs.

During 2019, our gross profit as a percentage of net sales decreased when compared to the prior year.

The decrease was primarily caused by three variables.

(1) A change in product and customer mix, as we experienced the combination of relatively slow net sales growth in our fastener product line and relatively faster net sales growth to our largest customers, for which National Accounts is a good proxy and which tend to have lower margins.

(2) We experienced rising freight expense as a result of costs related to transporting products, particularly shipping fees, driver wages, and fuel.

(3) We experienced an increase in the cost of our products due to generalized inflation and tariffs resulting from disputes between the United States and its trade partners.

We implemented several actions to mitigate the impact of these cost increases in 2019, including price increases.

For the full year, the net impact of these actions was minor.

However, the impact through the year differed, with a larger negative impact on the gross profit percentage in the first half of 2019 and a relatively modest impact in the second half of 2019.

Operating and Administrative Expenses

Our operating and administrative expenses (including the gain on sales of property and equipment), as a percentage of net sales, improved to 25.3% in 2020 from 27.3% in 2019.

This improvement was a function of the growth in employee-related, occupancy-related, and all other operating and administrative expenses being more modest than the growth in sales.

Employee-related expenses improved the ratio of operating and administrative expenses as a percentage of sales by 140 to 145 basis points in 2020 from 2019.

Occupancy-related expenses improved the ratio of operating and administrative expenses as a percentage of sales by 25 to 30 basis points in 2020 from 2019.

All other operating and administrative expenses improved the ratio of operating and administrative expenses as a percentage of sales by 40 to 45 basis points in 2020 from 2019.

Our operating and administrative expenses (including the gain on sales of property and equipment), as a percentage of net sales, improved to 27.3% in 2019 from 28.2% in 2018.

Our operating and administrative expenses, as a percentage of net sales, increased by approximately 70 basis points to 26.0% in 2021 from 25.3% in 2020.

Employee-related expenses, as a percentage of net sales, increased by approximately 80 basis points.

Occupancy-related expenses, as a percentage of net sales, decreased by approximately 10 basis points.

All other operating and administrative expenses, as a percentage of net sales, was largely unchanged in 2021 from 2020.

Our operating and administrative expenses, as a percentage of net sales, improved to 25.3% in 2020 from 27.3% in 2019.

This improvement was a function of the growth in employee-related, occupancy-related, and all other operating and administrative expenses being more modest than the growth in sales.

5 unchanged sentences

2021 2020 2019

Employee-related expenses 68% to 73% (1)

-2.0 % 5.1 % 11.1 %

Employee-related expenses 70% 11.6 % -2.0 % 5.1 %

Occupancy-related expenses 15% to 20% 3.9 % 0.3 % 2.8 %

All other operating and administrative expenses 10% to 15% 4.9 % -7.2 % 1.5 %

(1) Employee-related expenses fell within a range of 68-73% of our total operating and administrative expenses during 2020.

During 2019, employee-related expenses fell within a range of 65-70% of our total operating and administrative expenses.

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.

Our employee-related expenses increased in 2021 from 2020.

This was related to:

improvement in our sales and profitability generating significantly higher bonuses and commissions;

higher health insurance costs as e mployees became comfortable again in seeking non-COVID-related health care;

an increase in our profit sharing contribution;

and higher full-time and part-time wages producing an increase in base pay .

Our employee-related expenses decreased in 2020 from 2019.

This was related to:

a decrease in full-time equivalent (FTE) headcount and related base wages and employment taxes related to efforts to reduce costs given weak demand in our traditional manufacturing and construction markets;

a decrease in FTE headcount and related base wages and employment taxes related to efforts to reduce costs given weak demand in our traditional manufacturing and construction markets;

lower bonuses and commissions given weak demand in our traditional manufacturing and construction markets;

and reduced costs associated with the Fastenal School of Business as training shifted from in-person to online.

and reduced costs associated with the Fastenal School of Business as

training shifted from in-person to online.

This was only partly offset by an increase in our profit sharing contribution and health care costs.

Our employee-related expenses increased in 2019 from 2018.

This was related to:

(1) an increase in FTE headcount related to efforts to support growth in our business, (2) higher performance bonuses and commissions due to growth in net sales and net earnings, (3) an increase in our profit sharing contribution and options awards, (4) increases in hourly base wages, and (5) increased health care costs.

The table below summarizes the percentage change in our FTE headcount at the end of the periods presented compared to the end of the prior period:

12 unchanged sentences

(1) Our non-in-market selling employee count has grown in recent years due to an increased focus on resources to support our growth drivers, particularly Onsite and national account growth.

(2) Administration primarily includes our Sales Support, Information Technology, Finance and Accounting, Human Resources, and senior leadership roles and functions.

Our administrative employee count has grown in recent years due to an increased focus on technology capabilities.

For example, 66.7% of the increase in administrative employees in 2020 over 2019 related to our additions to our information technology teams.

(2) Administrative primarily includes our Sales Support, Information Technology, Finance and Accounting, Human Resources, and senior leadership roles and functions.

Our administrative employee count has also grown in recent years due to increased personnel investments in information technology and operational support, such as purchasing and product development.

Occupancy-related expenses include:

(1) building rent and depreciation, (2) building utility costs, (3) equipment related to our branches and distribution locations, and (4) industrial vending equipment (we consider the vending equipment, excluding leased locker equipment, to be a logical extension of our in-market operations and classify the depreciation and repair costs as occupancy expenses).

Our occupancy-related expenses increased in 2021 from 2020.

This was related to:

the timing of development costs related to equipment utilized as part of our FMI suite of technologies;

depreciation related to a higher installed base of FMI devices;

and higher facility costs, with higher costs for non-branch facilities and utilities being only partly offset by slightly lower costs for branch facilities from branch closings.

Our occupancy-related expenses increased slightly in 2020 from 2019.

This was primarily due to higher depreciation related to facility expansions completed in 2019, partly offset by lower utility costs in our branches.

Our occupancy-related expenses increased in 2019 from 2018.

This was related primarily to:

higher depreciation as a result of facility expansions completed during the year;

and increases to industrial vending equipment.

All other operating and administrative expenses include:

(1) selling-related transportation, (2) information technology (IT) expenses, (3) general corporate expenses, which consists of legal expenses, general insurance expenses, travel and marketing expenses, etc., and (4) the gain on sales of property and equipment.

Combined, all other operating and administrative expenses increased in 2021 from 2020.

This was related to:

higher spending on information technology;

higher spending on travel, meals, and supplies as business activity recovered from the COVID-related travel restrictions of 2020;

and higher costs for legal settlements.

These elements were partly offset by lower bad debt expenses and lower general insurance costs.

Combined, all other operating and administrative expenses decreased in 2020 from 2019.

2 unchanged sentences

This was partly offset by higher spending on information technology.

Combined, all other operating and administrative expenses increased in 2019 from 2018.

This was related to:

higher spending on information technology;

and higher selling-related freight expense.

Net Interest Expense

Our net interest expense was $9.6 in 2021 compared to $9.1 in 2020, and $13.6 in 2019.

This was related to:

lower interest income, as the special dividend paid in December 2020 resulted in lower interest-earning cash balances in 2021;

slightly higher interest expense which was the net result of slightly higher average interest rates and slightly lower average debt.

During the year, we repaid one tranche under our Master Note Agreement, reducing the balance from $405.0 to $390.0.

However, in the fourth quarter of 2021 we increased our balance outstanding under our revolver by $25.0 to support working capital growth.

The decrease in 2020, when compared to 2019, was due to a slightly lower average debt balance paired with substantially lower interest rates.

During the year, we increased the debt held under our Master Note Agreement to $405.0 as a means of fixing a portion of our debt and freeing up borrowing capacity under our revolver.

This debt has various maturities and interest rates, which collectively are at attractive levels.

The increase in 2019, when compared to 2018, was mainly caused by higher average interest rates and a higher average debt balance during the period.

We recorded income tax expense of $282.8 in 2021, or 23.4% of earnings before income taxes.

Our income tax expense was reduced by $5.3 due to discrete items mainly relating to benefits associated with the exercise of stock options and changes in the reserve for uncertain tax positions.

Our effective tax rate reflects an $8.7 reduction in income tax expense due to discrete items mainly relating to benefits associated with the exercise of stock options and changes in the reserve for uncertain tax positions.

We recorded income tax expense of $273.6 in 2020, or 24.2% of earnings before income taxes.

Our income tax expense was reduced by $2.6 as a result of applying guideline clarifications issued by the IRS on certain aspects of tax reform, as well as tax benefits associated with the exercise of stock options.

This reduced our tax rate in the period by 30 basis points.

Our income tax expense was reduced by $5.3 due to discrete items mainly relating to benefits associated with the exercise of stock options and changes in the reserve for uncertain tax positions.

Net earnings, net earnings per share (EPS), the percentage change in net earnings, and the percentage change in EPS, were as follows:

9 unchanged sentences

Tax Rate 23.4 % 24.2 % 24.2 %

(1) As a result of the Tax Act, discrete tax items benefited our net earnings by $7.1 during 2018.

During 2020 and 2019, net earnings increased, primarily due to stronger sales and higher operating profits, and were only partly offset by an increase in income tax expense.

The increase in basic and diluted earnings per share also reflected the purchase of our shares of common stock in 2020.

During 2021, net earnings increased, primarily due to stronger sales translating into higher pre-tax profits, as well as a lower income tax rate.

In 2020, net earnings increased, primarily due to stronger sales and higher operating profits, and were only partly offset by an increase in income tax expense.

The increase in basic and diluted earnings per share also reflected the purchase of our shares of common stock.

Results of Operations (Comparison to 2019 Periods)

Given the unusual nature of our marketplace during 2021 and 2020 due to the COVID-19 pandemic, we believe that a comparison of certain results of operations during the year and fourth quarter of 2021 to the same periods in 2019 provides further insight into sustainable trends and underlying performance of our business.

As discussed earlier in this report, there were certain aspects of the COVID-19 pandemic that dramatically impacted our business during 2020.

Given this, we believe that a comparison to the 2019 periods is helpful to demonstrate changes in financial condition and our results of operations during the most recently ended quarter and year.

The table below provides such a comparison:

Twelve-month Period Three-month Period

2021 2019 Change 2021 2019 Change

Net sales $ 6,010.9 5,333.7 12.7 % $ 1,531.8 1,276.9 20.0 %

Business days 253 254 62 63

Daily sales $ 23.8 21.0 13.1 % $ 24.7 20.3 21.9 %

Gross profit $ 2,777.2 2,515.4 10.4 % $ 712.9 598.4 19.1 %

% of net sales 46.2 % 47.2 % 46.5 % 46.9 %

Operating and administrative expenses $ 1,559.8 1,458.2 7.0 % $ 412.0 359.5 14.6 %

% of net sales 26.0 % 27.3 % 26.9 % 28.2 %

Operating income $ 1,217.4 1,057.2 15.2 % $ 300.9 238.9 25.9 %

% of net sales 20.3 % 19.8 % 19.6 % 18.7 %

Earnings before income taxes $ 1,207.8 1,043.7 15.7 % $ 298.5 236.4 26.3 %

% of net sales 20.1 % 19.6 % 19.5 % 18.5 %

Net earnings $ 925.0 790.9 17.0 % $ 231.2 178.7 29.4 %

Diluted net earnings per share $ 1.60 1.38 16.4 % $ 0.40 0.31 28.9 %

Liquidity and Capital Resources

4 unchanged sentences

% of net earnings 83.3 % 128.3 % 106.5 %

In 2020, the increase in our operating cash flow as a percentage of net earnings is due to working capital assets and liabilities being a modest source of cash in 2020, as opposed to a significant use of cash in 2019.

In 2021, the decrease in our operating cash flow as a percentage of net earnings is due to significant growth in working capital as we support growth in our customers' operations as well as, in the case of inventory, significant product inflation.

This was only slightly mitigated by ongoing efforts to improve the efficiency of our working capital and contrasts sharply with 2020 when weaker demand from our customers resulted in working capital being a net source of operating cash.

In 2020, the increase in our operating cash flow as a percentage of net earnings was due to working capital assets and liabilities being a modest source of cash in 2020, as opposed to a significant use of cash in 2019.

This includes the deferral o f $30.0 in payroll taxes resulting from the CARES Act and a timing-related higher accounts payable balance.

In 2019, the increase in our operating cash flow as a percentage of net earnings reflects a reduced drag from working capital investment than what was experienced in 2018 and, to a lesser degree, higher net income.

Trade Working Capital Assets

14 unchanged sentences

Note – Amounts may not foot due to rounding difference.

In 2020, the annual growth in net accounts receivable reflects growth in sales, mitigated by the substantial increase in sales to government customers, which tended to have shorter payment terms in 2020, and strong collections at year end.

In 2019, the annual growth in net accounts receivable reflects not only our growth in sales, but also the fact that our growth is being driven disproportionately by our national accounts program where our customers tend to have longer payment terms than our customer base as a whole.

Growth was also relatively stronger with customers outside the U.S., which similarly tend to have longer payment terms than our customer base as a whole.

The rate of growth in receivables did slow throughout 2019, largely reflecting the impact on receivables of softer business activity.

In 2021, the annual growth in net accounts receivable reflected several factors.

First, our receivables are expanding as a result of improved business activity and resulting growth in our customers' sales.

Second, in response to the COVID-19 pandemic, customers that traditionally have shorter payment terms represented a smaller proportion of our sales mix at the end of 2021 than was the case at the end of 2020.

In 2020, the annual growth in net accounts receivable reflected growth in sales, mitigated by the substantial increase in sales to government customers, which tended to have shorter payment terms in 2020, and strong collections at year end.

Our inventory balances over time will respond to business activity, though various factors produce a looser relationship to our monthly sales patterns than we tend to experience in accounts receivable.

3 unchanged sentences

A second reason is our growth drivers, including our FMI offerings, Onsite channel, and international expansion, all of which tend to require significant investments in inventory.

In 2021, our inventories increased, reflecting significant inflation in the value of stocked parts, and the addition of inventory to support the growth of our manufacturing and construction customers as they expand production to meet improved business activity, and deeper inventory stocking due to disruption in supply chains.

In 2020, our inventories decreased, reflecting a number of factors, including reduced stocking needs on the part of our traditional manufacturing and construction customers due to weak business activity, reduced vending and Onsite signings, and good execution on initiatives aimed at improving our inventory balances.

This was partly offset by COVID-related PPE balances that we added in the second quarter of 2020 and have been declining over the second half of 2020, but we had no such PPE inventory in the preceding year.

In 2019, our inventories increased to support higher sales, reflecting large increases in the number of installed vending devices and active Onsite locations, and from inflation and tariffs.

This was partly offset by COVID-related PPE balances that we added in the second quarter of 2020 and declined over the second half of 2020, but we had no such PPE inventory in the preceding year.

In 2021, the annual growth in accounts payable reflected product purchases increasing to support the improvement in business activity at our manufacturing and construction customers.

In 2020, the annual growth in accounts payable reflected primarily the timing of certain payments that slipped out of the fourth quarter of 2020 and into the first quarter of 2021.

In 2019, the slight decrease in accounts payable came as a result of softer year end business activity.

The approximate percentage mix of inventory stocked at our selling locations versus our distribution center and manufacturing locations was as follows at year end:

3 unchanged sentences

Total 100 % 100 % 100 %

Lease Obligations

We have facilities, equipment, and vehicles leased under operating leases.

A discussion of our lease obligations is contained in Note 8 of the Notes to Consolidated Financial Statements.

Net Cash Used in Investing Activities

3 unchanged sentences

% of net earnings 16.1 % 32.8 % 30.3 %

The changes in net cash used in investing activities in 2020 were primarily related to an increase of $125.0 for the purchase of certain assets of Apex Industrial Technologies LLC, which was partly offset by changes in our net capital expenditures.

The changes in net cash used in investing activities in 2019 was primarily related to changes in our net capital expenditures.

The changes in net cash used in investing activities in 2021 was primarily related to the absence of an acquisition, in contrast to the $125.0 spent in 2020 for the purchase of certain assets of Apex Industrial Technologies LLC (Apex), as well as lower net capital expenditures.

The changes in net cash used in investing activities in 2020 were primarily related to an increase of $125.0 for the purchase of certain assets of Apex, which was partly offset by changes in our net capital expenditures.

Property and equipment expenditures typically consist primarily of:

14 unchanged sentences

Our net capital expenditures decreased in 2021, when compared to 2020.

We had higher spending on an office building construction project in Winona, Minnesota intended to support growth in our business.

This was more than offset by reduced spending in other areas.

We saw a significant decline in spending on FMI equipment due to slower hardware signings, lower vending equipment costs following the March 2020 acquisition of certain industrial vending assets of Apex, and an increase in the refurbishment and redeployment of FMI hardware as an alternative to buying new devices.

We also had lower capital investment in our hub properties following a period of heavier investment in 2018 and 2019, and reduced spending on selling-related vehicles as challenges in the supply chain reduced availability.

Our net capital expenditures decreased in 2020, when compared to 2019.

We reduced capital spending expectations early in 2020 across most tracked categories as financial uncertainty related to the pandemic response emerged.

The decline relates to lower spending on facility capacity and equipment following our investments in 2019, lower spending for vending devices as a result of our acquisition of certain assets of Apex and lower signings, lower spending on our captive fleet, and lower spending for manufacturing equipment.

Our net capital expenditures increased in 2019, when compared to 2018, primarily due to increased spending on hub property and equipment, both to expand current capacity and for potential future expansion, higher spending on vending devices to support the growth of our industrial vending program, and investment in our trucking assets.

We expect our net capital expenditures in 2022 to be within a range of $180.0 to $200.0.

This increase from 2020 relates to increased spending for a non-hub construction project in Winona to support growth, higher maintenance spending across most tracked categories following tighter spending control in 2020, and lower anticipated proceeds from asset sales.

These factors will be slightly offset by lower spending on vending devices due to a full year of lower unit cost following our acquisition of certain assets of Apex.

We anticipate funding our capital expenditure needs with cash generated from operations, from available cash and cash equivalents, and, if necessary, from our borrowing capacity.

This increase from 2021 reflects an increase in spending on FMI equipment in anticipation of higher signings, an increase in spending on hub properties to reflect upgrades to and investments in automation as well as facilities upgrades, and an increase in manufacturing capacity to support demand and expand capabilities.

This is partly offset by the absence of spending on our Winona construction project, which was completed in 2021.

Net Cash Used in Financing Activities

20 unchanged sentences

Stock Purchases

In 2021, we did not purchase any shares of our common stock.

In 2020, we pu rchased 1,600,000 shares of our common stock at an average price of approximately $32.54.

In 20 19, we did not purchase any shares of our common stock.

In 2018, we purchased 4,000,000 shares of our common stock at an average price of approximately $25.75 per share.

We declared a quarterly dividend of $0.28 per share on January 19, 2021.

In 2020, we paid aggregate annual dividends per share of $1.40.

This included $1.00 in regular quarterly dividends and a $0.40 special dividend paid in December 2020 as a result of our high cash balances and favorable financial outlook.

In 2019, we paid aggregate annual dividends per share of $0.87 .

In order to fund the considerable cash needed to expand our industrial vending business, expand capacity and increase the use of automation in our distribution centers, pay dividends, and, in 2020, to purchase our common stock, pre-pay vendors to secure access to critical products during the pandemic, and acquire certain assets of Apex Industrial Technologies LLC, we have borrowed under our Credit Facility and our Master Note Agreement in recent periods.

We declared a quarterly dividend of $0.31 per sh are on January 18, 2022 .

In 2021, we paid aggregate annual dividends per sha re of $1.12.

In 2020, we paid aggregate annual dividends per share of $1.40, which included $1.00 in regular quarterly dividends and a $0.40 special dividend paid in December 2020 as a result of our high cash balances and favorable financial outlook.

In order to fund the considerable cash needed to expand our industrial vending business, expand capacity and increase the use of automation in our distribution centers, pay dividends, and, in 2020, to purchase our common stock, pre-pay vendors to secure access to critical products during the pandemic, and acquire certain assets of Apex, we have borrowed under our Credit Facility and our Master Note Agreement in recent periods.

Our borrowings under the Credit Facility and Master Note Agreement peaked during each quarter of 2021 and 2020 as follows:

4 unchanged sentences

Fourth quarter 470.0 495.0

As of December 31, 2020, we had no loans outstanding under the Credit Facility and had contingent obligations from letters of credit outstanding under the Credit Facility in an aggregate face amount of $36.3.

As of December 31, 2021, we had $25.0 outstanding under the Credit Facility and had contingent obligations from letters of credit outstanding under the Credit Facility in an aggregate face amount of $36.3.

As of December 31, 2021, we had loans outstanding under the Master Note Agreement of $365.0.

Descriptions of our Credit Facility and Master Note Agreement are contained in Note 9 of the Notes to Consolidated Financial Statements.

Material Cash Requirements

Our material cash requirements for known contractual obligations include capital expenditures, debt, and lease obligations, each of which are discussed in more detail earlier in this section.

We believe that net cash provided by operating activities will be adequate to meet our liquidity and capital needs for these items in the short-term over the next 12 months and also in the long-term beyond the next 12 months.

We also have cash requirements for purchase orders and contracts for the purchase of inventory and other goods and services, which are based on current distribution needs and are fulfilled by our suppliers within short time horizons.

We do not have significant agreements for the purchase of inventory or other goods or services specifying minimum order quantities.

In addition, we may have liabilities for uncertain tax positions but we do not believe any of these liabilities will be material.

A discussion of income taxes is contained in Note 7 of the Notes to Consolidated Financial Statements.

Unremitted Foreign Earnings

5 unchanged sentences

Effects of Inflation

In 2021, we experienced significant increases in the cost of metals (especially steel), energy, and transportation costs (especially overseas containers and shipping).

These inflationary trends meaningfully increased the cost of many of the products we purchase.

We were able to mitigate the adverse effects of higher costs on our gross profit percentage in 2021 by increasing prices, seeking alternative sources for products and services, and consolidating spend for products and services.

While the effects of inflation in 2021 was broad-based, we did experience deflation for certain COVID-related products that had inflated in 2020 when the supply chain was disrupted.

This did require us to write down the value of these products in 2021, which negatively impacted our gross profit percentage in the first quarter of 2021 and, to a lesser extent, throughout the balance of the year.

In 2020, we experienced changing price levels for COVID-related supplies, with inflation for certain products that were in short supply (e.g., nitrile gloves) and deflation for certain products that became oversupplied (e.g., disposable masks).

1 unchanged sentence

As it related to the non-COVID environment, we experienced stable product costs through 2020 relative to 2019.

We experienced higher product costs through 2019 relative to 2018 as a result of generalized inflation and tariffs, though the impact of these items did moderate later in the year as economic activity slowed and conditions around trade stabilized.

We took actions during the year to mitigate the effects of higher product costs, including increasing product prices.

These actions were not able to offset the pressure we experienced on our gross profit percentage in the first half of 2019, but were more effective at doing so in the second half of 2019.

Critical Accounting Policies and Estimates

13 unchanged sentences

Historically, actual required reserves have not varied materially from estimated amounts.

Inventory valuation – The valuation of inventory is based on an analysis of inventory trends including reviews of inventory levels, sales information, and the on-hand quantities relative to the sales history for the product.

Inventory valuation – Adjustments to the valuation of inventory are based on an analysis of inventory trends including reviews of inventory levels, sales information, and the on-hand quantities relative to the sales history for the product.

Our methodology for estimating whether adjustments are necessary is continually evaluated for factors 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.

If business or economic conditions change, our

estimates and assumptions may be adjusted as deemed appropriate.

Historically, actual required adjustments have not varied materially from estimated amounts.

10 unchanged sentences

Risk Factors'.

Certain Contractual Obligations

As of December 31, 2020, 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:

Total 2021 2022 and 2023 2024 and 2025 After 2025

Principal of long-term debt $ 405.0 40.0 105.0 135.0 125.0

Interest on long-term debt (1)

47.8 10.8 18.8 10.5 7.7

Operating leases (2)

256.4 98.0 115.7 37.2 5.5

Total $ 709.2 148.8 239.5 182.7 138.2

(1) Interest on the long-term debt outstanding under our Credit Facility was calculated using the interest rates and balances at December 31, 2020.

(2) Amounts include lease liabilities for pick-up truck leases, which typically have a non-cancelable lease term of less than one year and are not included on the consolidated balance sheets as an operating lease right-of-use asset.

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 suppliers 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, which we believe will be immaterial.

A discussion of income taxes is contained in Note 8 of the Notes to Consolidated Financial Statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis