FASTENAL CO 10-Q

ITEM 2 — MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements. Dollar amounts are stated in millions except for share and per share amounts and where otherwise noted. Throughout this document, percentage and dollar change calculations, which are based on non-rounded dollar values, may not be able to be recalculated using the dollar values in this document due to the rounding of those dollar values. Business Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of approximately 3,200 in-market locations. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes sales of products for both original equipment manufacturing (OEM), where our products are consumed in the final products of our customers, and manufacturing, repair and operations (MRO), where our products are consumed to support the facilities and ongoing operations of our customers. The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our products include farmers, truckers, railroads, oil exploration companies, oil production and refinement companies, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our branches, Onsite locations, and customers are primarily located in North America. Our motto is Where Industry Meets Innovation ™ . We are a customer and growth-centric organization focused on identifying unique technologies, capabilities, and supply chain solutions that get us closer to our customers and reduce the total cost of their global supply chain. We believe this close-to-the-customer, high touch partnership approach is differentiated in the marketplace and allows us to gain market share in what remains a fragmented industrial distribution market. Executive Overview Net sales increased $287.0, or 20.3%, in the first quarter of 2022 when compared to the first quarter of 2021. There was one more selling day in the quarter relative to the year earlier period, and taking this into consideration our net daily sales increased 18.4% in the first quarter of 2022 when compared to the first quarter of 2021. This increase is due to improved unit sales across most products to our traditional manufacturing and construction customers, resulting from continued improvement in business activity. Our net daily sales growth also benefited by roughly 100 basis points from the absence of last year's adverse weather. Our gross profit increased $149.9, or 23.3%, in the first quarter of 2022 relative to the first quarter of 2021, and as a percentage of net sales increased to 46.6% in the first quarter of 2022 from 45.4% in the first quarter of 2021. Our operating income increased $77.7, or 27.7%, in the first quarter of 2022 relative to the first quarter of 2021, and as a percentage of net sales increased to 21.0% in the first quarter of 2022 from 19.8% in the first quarter of 2021. Our net earnings during the first quarter of 2022 were $269.6, an increase of 28.0% compared to the first quarter of 2021. Our diluted net earnings per share were $0.47 during the first quarter of 2022, which increased from $0.37 during th e first quarter of 2021. The table below summarizes our total and FTE (based on 40 hours per week) employee headcount, our investments related to in-market locations (defined as the sum of the total number of branch locations and the total number of active Onsite locations), and weighted Fastenal Managed Inventory (FMI) devices at the end of the periods presented and the percentage change compared to the end of the prior periods. Change Since: Change Since: Q1 2022 Q4 2021 Q4 2021 Q1 2021 Q1 2021 In-market locations - absolute employee headcount 12,855 12,464 3.1 % 12,683 1.4 % In-market locations - FTE employee headcount 11,644 11,337 2.7 % 11,323 2.8 % Total absolute employee headcount 21,167 20,507 3.2 % 20,532 3.1 % Total FTE employee headcount 18,958 18,370 3.2 % 18,094 4.8 % Number of branch locations 1,760 1,793 -1.8 % 1,959 -10.2 % Number of active Onsite locations 1,440 1,416 1.7 % 1,285 12.1 % Number of in-market locations 3,200 3,209 -0.3 % 3,244 -1.4 % Weighted FMI devices (MEU installed count) (1) 94,425 92,874 1.7 % 85,157 10.9 % (1) This number excludes approximately 10,000 non-weighted devic es that are part of our locker lease program. During the last twelve months, we increased our total FTE employee headcount by 864. This reflects an increase in our in-market and non-in-market selling FTE employee headcount of 541 to support growth in the marketplace and sales initiatives 12 Table of Contents targeting customer acquisition. We had an increase in our distribution center FTE employee headcount of 161 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 162 that relates primarily to personnel investments in information technology, manufacturing, and operational support, such as purchasing and product development. Much of the increase in our FTE count noted above has occurred in the first quarter of 2022 specifically as the market for hiring has improved. Of the 864 increase in total FTE, approximately 72% were added in the first quarter of 2022. Of the 541 increase in in-market and non-in-market FTE, approximately 79% were added in the first quarter of 2022. Of the 161 increase in distribution center FTE, approximately 72% were added in the first quarter of 2022. Of the 162 increase in remaining FTE, approximately 49% were added in the first quarter of 2022. We opened six branches in the first quarter of 2022 and closed 39 branches, net of conversions. We activated 57 Onsite locations in the first quarter of 2022 and closed 33, 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 The following sets forth condensed consolidated statement of earnings information (as a percentage of net sales) for the periods ended March 31: Three-month Period 2022 2021 Net sales 100.0 % 100.0 % Gross profit 46.6 % 45.4 % Operating and administrative expenses 25.5 % 25.6 % Operating income 21.0 % 19.8 % Net interest expense -0.1 % -0.2 % Earnings before income taxes 20.9 % 19.6 % Note – Amounts may not foot due to rounding difference. Net Sales The table below sets forth net sales and daily sales for the periods ended March 31, and changes in such sales from the prior period to the more recent period: Three-month Period 2022 2021 Net sales $ 1,704.1 1,417.0 Percentage change 20.3 % 3.7 % Business days 64 63 Daily sales $ 26.6 22.5 Percentage change 18.4 % 5.3 % Daily sales impact of currency fluctuations -0.1 % 0.6 % Note – Daily sales are defined as the total net sales for the period divided by the number of business days (in the United States) in the period. Net sales increased $287.0, or 20.3%, in the first quarter of 2022 when compared to the first quarter of 2021. There was one more selling day in the quarter relative to the year earlier period, and taking this into consideration our net daily sales increased 18.4% in the first quarter of 2022 when compared to the first quarter of 2021. This increase is due to improved unit sales across most products to our traditional manufacturing and construction customers, resulting from continued improvement in business activity. Our net daily sales growth also benefited by roughly 100 basis points from the absence of last year's adverse weather. The overall impact of product pricing on net sales was 580 to 610 basis points during the first qu arter of 2022. This increase reflects pricing actions taken during 2021, particularly in the second half, and the first quarter of 2022. These actions were taken as part of our strategy to mitigate the impact of marketplace inflation for our products, particularly fasteners, and transportation services. During the first quarter of 2022 , costs for fuel and transportation services accelerated in their 13 Table of Contents inflationary impact. We will continue to take actions aimed a t mitigating the impact of product and transportation cost inflation as the need arises in 2022. The impact of product pricing on net sales in the first quarter of 2021 was 60 to 90 ba sis points. From a product standpoint, we have three categories: fasteners, safety products, and other products, the latter of which includes eight smaller product categories, such as tools, janitorial supplies, and cutting tools. Fastener daily sales increased 24.6% over the first quarter of 2021, and represented 34.3% of our net sales in the first quarter of 2022; fasteners represented 32.5% of net sales in the first quarter of 2021. S afet y daily sales, which inc ludes personal protective equipment (PPE), increased 15.3% over the first quarter of 2021 and represented 21.0% of our net sales in the first quarter of 2022; safety products represented 21.5% of net sales in the first quarter of 2021. Daily sales of other products increased 14.8% over the first quarter of 2021 and represented 44.7% of our net sales in the first quarter of 2022; other products represented 46.0% of net sales in the first quarter of 2021. From an end market standpoint, daily sales to our manufacturing customers increased 23.9% in the first qu arter of 2022 from the first quarter of 2021. Daily sales to our non-residential construction customers increased 14.1% in the first quarter of 2022 from the first quarter of 2021. Sales trends for our traditional manufacturing and construction customers reflected sustained strength in underlying economic activity as well as favorable product pricing. Sales to government customers, which includes health care providers, decreased 6.2% and was 4.3% of sa les in the first quarter of 2022, down from 5.4% in the first quarter of 2021 . We report our customers in two categories: national accounts, which are customers with a multi-site contract, and non-national accounts, which include large regional customers, small local customers, and government customers . Daily sales to our national account customers increased 22.8% in the first quarter of 2022 over the first quarter of 2021. Most of our national account customers grew in the first quarter of 2022 over the year earlier period, as our sales grew at 92 of our Top 100 national account customers. Revenues attributable to national account customers represented 57.1% of our total revenues in the period. Daily sales to our non-national account customers, which includes government customers, increased 13.0% in the first quarter of 2022 from the first quarter of 2021. Revenues attributable to non-national account customers represented 42.9% of our total revenues in the period. Our growth driver signings have been challenged over recent quarters. At various times over the last several years, the COVID-19 pandemic, severe constraints on supply chains and labor availability, and/or significant inflation have created issues with access to facilities and key decision-makers or diverted energy from conversations about our growth drivers. However, as the primary effects of the pandemic have receded and as supply chain, labor and marketplace challenges have stabilized, the outlook for signings activity going forward is improved. • During the first quarter of 2022, we signed 106 new Onsite locations (defined as dedicated sales and service provided from within, or in close proximi ty to, the customer's facility). We had 1,440 active sites on March 31, 2022, which represented an increase of 12.1% from March 31, 2021. Daily sales through our Onsite locations, excluding sales transferred from branches to new Onsites, grew at a better than 20% rate in the first quarter of 2022 over the first quarter of 2021. This growth is due to improved business activity from our Onsite customers and, to a lesser degree, contributions from the increase in the number of Onsites we operate. It is not unusual for Onsite signings to be relatively strong in first quarters of calendar years. The signings in the first quarter of 2022 represent a record number for any quarter and a substantial improvement on first quarter signings over the prior two years. We believe this reflects normalization of the business environ ment which is improving access to facilities and decision-makers while reviving customers' strategic planning around supply chain solutions. We continue to believe the market will support a long-term rate of 375 to 400 annual signings, and this remains our goal for Onsite signings in 2022. • FMI Technology is comprised of our FASTStock ℠ (scanned stocking locations), FASTBin ℠ (infrared, RFID, and scaled bins), and FASTVend ℠ (vending devices) offering. FASTStock's fulfillment processing technology is not embedded, is relatively less expensive and highly flexible in application, and delivered using our proprietary mobility technology. FASTBin and FASTVend incorporate highly efficient and powerful embedded data tracking and fulfillment processing technologies. Prior to 2021, we reported exclusively on the signings, installations, and sales of FASTVend. Beginning in the first quarter of 2021, we began disclosing certain statistics around our FMI offering. The first statistic is a weighted FMI ® measure which combines the signings and installations of FASTBin and FASTVend in a standardized machine equivalent unit (MEU) based on the expected output of each type of device. We do not include FASTStock in this measurement because scanned stocking locations can take many forms, such as bins, shelves, cabinets, pallets, etc., that cannot be converted into a standardized MEU. The second statistic is revenue through FMI Technology which combines the net sales through FASTStock, FASTBin, and FASTVend. A portion of the growth in net sales experienced by FMI, particularly FASTStock and FASTBin, reflects the migration of products from less efficient non-digital stocking locations to more efficient, digital stocking locations. 14 Table of Contents The table below summarizes the signings and installations of, and sales through, our FMI devices. Three-month Period 2022 2021 Change Weighted FASTBin/FASTVend signings (MEUs) 5,329 4,683 13.8 % Signings per day 83 74 Weighted FASTBin/FASTVend installations (MEUs; end of period) 94,425 85,157 10.9 % FASTStock sales $ 198.5 $ 110.5 79.5 % % of sales 11.5 % 7.7 % FASTBin/FASTVend sales $ 412.0 $ 301.0 36.9 % % of sales 23.9 % 21.0 % FMI sales $ 610.5 $ 411.5 48.4 % FMI daily sales $ 9.5 $ 6.5 46.0 % % of sales 35.4 % 28.7 % Our signings in the first quarter of 2022 were below the pace necessary to achieve our annual goals. However, we had meaningful improvement in signings per day on both an annual and sequential basis and experienced better momentum through the quarter. As a result, our 2022 goal for weighted FASTBin and FASTVend device signings remains at 23,000 to 25,000 MEUs. All metrics provided above exclude ap proximately 10,000 non-wei ghted vending devices that are part of a leased locker program. • Our eCommerce business includes sales made through an electronic data interface (EDI), or other types of technical integrations, and through our web verticals. Daily sales through eCom merce grew 55.6% in the first quarter of 2022. Revenues attributable to eCommerce represented 16.1% of our total revenues in the first quarter of 2 022. Our digital products and services are comprised of sales through FMI (FASTStock, FASTBin, and FASTVend) plus that proportion of our eCommerce sales that do not represent billings of FMI services (collectively, our Digital Footprint). We believe the data that is created through our digital capabilities enhances product visibility, traceability, and control that reduces risk in operations and creates ordering and fulfillment efficiencies for both ourselves and our customers. As a result, we believe our opportunity to grow our business will be enhanced through the continued development and expansion of our digital capabilities. Our Digital Footprint in the first quarter of 2022 represented 47.0% of our sales. We began to provide this figure in the first quarter of 2021, when we reported that our Digital Footprint represented 34.8% of our sales. We subsequently identified a calculation error. Using the same approach to calculating our Digital Footprint as we used starting in the second quarter of 2021, our Digital Footprint represented 39.1% of our sales in the first quarter of 2021. Sales by Product Line The approximate mix of sales from fasteners, safety supplies, and all other product lines was as follows for the periods ended March 31: Three-month Period 2022 2021 Fasteners 34.3 % 32.5 % Safety supplies 21.0 % 21.5 % Other product lines 44.7 % 46.0 % 100.0 % 100.0 % Gross Profit Our gross prof it, as a percentage of net sales, increased 120 basis points to 46.6% in the first q uarter of 2 022 from 45.4% in the first quarter of 2021. This increase reflects a couple of items. First, the first quarter of 2021 included a $7.8 write-down of masks, the value of which had declined significantly as supply shifted from tightly constrained in mid-2020 to abundantly available in early 2021. The absence of this write-down contributed 60 basis points to the increase in the gross margin percentage in the first quarter of 2022. Second, product margins improved, primarily due to a high er gross profit percentage realized in our safety products. This was a result of the margin of COVID-related products returning to pre-pandemic levels. 15 Table of Contents The first quarter of 2022 did not have the large, multi-quarter commitments to supply COVID supplies, generally at a lower margin, that existed in the first quarter of 2021. This more than offset slightly lower fastener product margins . The impact of price/cost was largely neutral to our gross profit percentage in the first quarter of 2022. These positive impacts to o ur gross profit percentage were partly offset by higher transportation expenses related primarily to higher overseas shipping costs, third-party freight charges, and the cost of fuel in our internal fleet. In addition, the net impact of product and customer mix was modestly negative as the dilutive impact of customer mix was slightly greater than the additive impact of product mix. Operating and Administrative Expenses In the first quarter of 2022 our operating and administrative expenses, as a percentage of net sa les, improved slightly to 25.5% in the first quarter of 2022 from 25.6% in the first quarter of 2021. A decline, as a percentage of net sales, in occupancy-related expens es was mostly offset by increases, as a percentage of net sales, in employee-related expenses and, to a lesser degree, other operating and administrative expenses. Th e percentage change in employee- related, occupancy-related, and all other operating and administrative expenses compared to the same periods in the preceding year, is outlined in the table below. Approximate Percentage of Total Operating and Administrative Expenses Three-month Period 2022 Employee-related expenses 70% to 75% 22.9 % Occupancy-related expenses 15% to 20% 5.2 % All other operating and administrative expenses 10% to 15% 25.6 % 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. In the first quarter of 2022, our employee-related expenses increased when compared to the first quarter of 2021 due to higher average FTE during the period, a greater proportion of full-time employees in our labor pool, and higher wages. We experienced a significant increase in bonus and commission payments, which rose at a rate greater than sales, reflecting improved business activity and financial performance versus the year-ago period. We also experienced higher costs for profit sharing and healthcare. The table below summarizes our FTE headcount at the end of the periods presented and the percentage change compared to the end of the prior periods: Change Since: Change Since: Q1 2022 Q4 2021 Q4 2021 Q1 2021 Q1 2021 In-market locations (branches & Onsites) 11,644 11,337 2.7 % 11,323 2.8 % Non-in-market selling 2,197 2,076 5.8 % 1,977 11.1 % Selling subtotal 13,841 13,413 3.2 % 13,300 4.1 % Distribution/Transportation 2,856 2,740 4.2 % 2,695 6.0 % Manufacturing 656 619 6.0 % 613 7.0 % Organizational support personel (1) 1,605 1,598 0.4 % 1,486 8.0 % Non-selling subtotal 5,117 4,957 3.2 % 4,794 6.7 % Total 18,958 18,370 3.2 % 18,094 4.8 % (1) Organizational support personnel consists of: (1) Sales & Growth Driver Support personnel (35%-40% of category), which includes sourcing, purchasing, supply chain, product development, etc.; (2) Information Technology personnel (30%-35% of category); and (3) Administrative Support personnel (25%-30% of category), which includes human resources, Fastenal School of Business, accounting and finance, senior management, etc. 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). 16 Table of Contents In the first quarter of 2022, our occupancy-related expenses increased when compared to the first quarter of 2021. Building expense was largely flat, with lower branch-related rent being offset by non-branch capacity expansions, while we saw higher utility costs and slightly higher expenses related to investments in hardware and equipment to support growth of FMI Technology. 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 loss (gain) on sales of property and equipment. Combined, all other operating and administrative expenses increased in the f irst quarter of 2022 when compared to the first quarter of 2021. This is largely due to increases in non-healthcare-related insurance costs and costs related to product movement and fuel for our local truck fleet. Net Interest Expense Our net interest expense was $2.3 in the first quarter of 2022, compared to $2.4 in the first quarter of 2021. Income Taxes We recorded income tax expense of $86.1 in the first quarter of 2022, or 24.2% of earnings before income taxes. Income tax expense was $67.3 in the first quarter of 2021, or 24.2% of earnings before income taxes. We believe our ongoing tax rate, absent any discrete tax items or broader changes to tax law, will be approximately 24.5%. Net Earnings Our net earnings during the first quarter of 2022 were $269.6, an increase of 28.0% compared to the first quarter of 2021. Our diluted net earnings per share were $0.47 during the first quarter of 2022, an increase of 27.8% when co mpared to th e first quarter of 2021. Liquidity and Capital Resources Cash flow activity was as follows for the periods ended March 31: Three-month Period 2022 2021 Net cash provided by operating activities $ 230.0 274.8 Percentage of net earnings 85.3 % 130.5 % Net cash used in investing activities $ 33.2 29.9 Percentage of net earnings 12.3 % 14.2 % Net cash used in financing activities $ 199.5 154.2 Percentage of net earnings 74.0 % 73.2 % Net Cash Provided by Operating Activities We produced operating cash flow of $230.0 in the first quarter of 2022, a decrease of 16.3% from the first quarter of 2021, representing 85.3% of the period's net earnings versus 130.5% in the first quarter of 2021. The decline in our operating cash flow and conversion rate is primarily due to an increased need for working capital to support our customer's growth as business activity improves, as well as from inflation in inventory. Customer mix, while not as significant a contributor in the period as customer growth and inflation, also contributes in two ways. First, our mix of traditional manufacturing and construction customers normalized along with general business conditions and were a greater proportion of our sales mix in the first quarter of 2022 than was the case in the first quarter of 2021; these customers tend to have longer payment terms and require more inventory to support. Second, national accounts continue to grow in our sales mix, and these customers tend to have longer payment terms. These impacts were only partly offset by growth in profits. 17 Table of Contents The dollar and percentage change in accounts receivable, net, inventories, and accounts payable as of March 31, 2022 when compared to March 31, 2021 were as follows: March 31 Twelve-month Dollar Change Twelve-month Percentage Change 2022 2021 2022 2022 Accounts receivable, net $ 1,071.6 851.0 $ 220.6 25.9 % Inventories 1,600.8 1,305.3 295.5 22.6 % Trade working capital $ 2,672.4 2,156.3 $ 516.1 23.9 % Accounts payable $ 289.9 215.1 $ 74.9 34.8 % Trade working capital, net $ 2,382.5 1,941.3 $ 441.3 22.7 % Net sales in last two months $ 1,163.6 969.1 $ 194.5 20.1 % Note - Amounts may not foot due to rounding difference. Our accounts receivable bala nce increased due to several factors. First, our receivables increased as a result of improved business activity and resulting growth in our customers' sales. Second, a year ago as a result of the COVID-19 pandemic we had a greater mix of customers that traditionally have shorter payment terms. As the effect of the pandemic has receded and manufacturing and construction markets have experienced strong growth, we saw a shift in our mix in the first quarter of 2022 towards customers that traditionally have longer payment terms. Inventory was $1,600.8 at the end of the first quarter of 2022, an increase of $295.5, or 22.6%, over the first quarter of 2021. The impact of inflation on the value of stocked parts continues to represent the most significant element behind the increase in our inventory in the period. However, increases in the quantity of goods flowing into our hubs is also contributing at a rising rate. This is due to our commitment to providing a resilient and robust supply chain as our manufacturing and construction customers expand production, deeper inventory stocking due to disruptions in supply chains, and the timing of arrival of imported product . Accounts payable were $289.9 at the end of the first quarter of 2022, an increase of $74.9, or 34.8%, over the first quarter of 2021 du e to our product purchases increasing to support the improvement in business activity at our manufacturing and construction customers. Net Cash Used in Investing Activities Net cash used in investing acti vi ties increased by $3.3 in the first quarter of 2022 when compared to the first quarter of 2021. This was primarily due to an increase in our net capital expenditures (purchases of property and equipment net of proceeds from sales of property and equipment) in the first quarter of 2022 compared to in the first quarter of 2021. Our capital spending will typical ly fall into six categories: (1) purchases related to industrial vending, (2) purchases of property and equipment related to expansion of and enhancements to distribution centers, (3) spending on software and hardware for our information processing systems, (4) the addition of fleet vehicles, (5) expansion, improvement or investment in certain owned or leased branch properties, and (6) the addition of manufacturing and warehouse equipment. Proceeds from the sales of property and equipment, typically for the planned disposition of pick-up trucks as well as distribution vehicles and trailers in the normal course of business, are netted against these purchases an d additions. During the first quarter of 2022, our net capital expenditures were $33.1, which is an increase of 10.3% from the first quarter of 2021. The increase relates to higher spending for FMI equipment to reflect current and anticipated growth in our installed base, higher spending on hub property and equipment to reflect automation and safety upgrades, and higher spending on information technology. This was partly offset by lower spending on non-hub property due to the absence of spending on our now-completed Winona, Minnesota office building and lower spendi ng for vehicles as tight supply chains have limited availability. Cash requirements for capital expenditures were satisfied from cash generated from operations, available cash and cash equivalents, our borrowing capacity, and the proceeds of disposals. In 2022, we continue to expect our investment in property and equipment, net of proceeds of sales, to be within a range of $180.0 to $200.0, an increase from $148.2 in 2021. This 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. In addition to capital expenditures, material cash requirements for known contractual 18 Table of Contents obligations include debt and lease obligations which are discussed in more detail earlier in this report in the Notes to Condensed Consolidated Financial Statements and in our 2021 annual report on Form 10-K. Net Cash Used in Financing Activities Net cash used in financing activities increased $45.3 in the first quarter of 2022 when compared to the first quarter of 2021. This is primarily due to a reduction in debt obligations and an increase in dividends. We returned $178.4 in dividends to our shareholders in the first quarter of 2022, compared to $160.8 in dividends in the first quarter of 2021. During the first quarters of 2022 and 2021, we did not purchase any shares of our common stock. We currently have authority to purchase up to 3,200,000 additional shares of our common stock. An overview of our cash dividends paid or declared in 2022 and 2021 is contained in Note 3 of the Notes to Condensed Consolidated Financial Statements. Critical Accounting Policies and Estimates – A discussion of our critical accounting policies and estimates is contained in our 2021 annual report on Form 10-K. Recently Issued and Adopted Accounting Pronouncements – A description of recently issued and adopted accounting pronouncements, if any, is contained in Note 1 of the Notes to Condensed Consolidated Financial Statements. Certain Risks and Uncertainties – Certain statements contained in this document do not relate strictly to historical or current facts. As such, they are considered 'forward-looking statements' that provide current expectations or forecasts of future events. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of terminology such as anticipate, believe, should, estimate, expect, intend, may, will, plan, goal, project, hope, trend, target, opportunity, and similar words or expressions, or by references to typical outcomes. Any statement that is not a purely historical fact, including estimates, projections, trends, and the outcome of events that have not yet occurred, is a forward-looking statement. Our forward-looking statements generally relate to our expectations and beliefs regarding the business environment in which we operate, our projections of future performance, our perceived marketplace opportunities, our strategies, goals, mission and vision, and our expectations related to future capital expenditures, future tax rates, future inventory levels, pricing, Onsite and weighted FMI device signings, and the impact of price increases and surge sales on overall sales growth or margin performance. You should understand that forward-looking statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. Factors that could cause our actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the impact of the COVID-19 pandemic, economic downturns, weakness in the manufacturing or commercial construction industries, competitive pressure on selling prices, changes in our current mix of products, customers, or geographic locations, changes in our average branch size, changes in our purchasing patterns, changes in customer needs, changes in fuel or commodity prices, inclement weather, changes in foreign currency exchange rates, difficulty in adapting our business model to different foreign business environments, failure to accurately predict the market potential of our business strategies, the introduction or expansion of new business strategies, weak acceptance or adoption of our FMI offering or Onsite business models, increased competition in FMI or Onsite, difficulty in maintaining installation quality as our FMI business expands, the leasing to customers of a significant number of additional FMI devices, the failure to meet our goals and expectations regarding branch openings, branch closings, or expansion of our FMI offering or Onsite operations, changes in the implementation objectives of our business strategies, our ability to retain certain government and other types of customers that bought product from us for the first time during the pandemic, difficulty in hiring, relocating, training, or retaining qualified personnel, difficulty in controlling operating expenses, difficulty in collecting receivables or accurately predicting future inventory needs, dramatic changes in sales trends, changes in supplier production lead times, changes in our cash position or our need to make capital expenditures, credit market volatility, changes in tax law or the impact of any such changes on future tax rates, changes in tariffs or the impact of any such changes on our financial results, changes in the availability or price of commercial real estate, changes in the nature, price, or availability of distribution, supply chain, or other technology (including software licensed from third parties) and services related to that technology, cyber-security incidents, potential liability and reputational damage that can arise if our products are defective, difficulties measuring the contribution of price increases on sales growth, acts of war, and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission, including our most recent annual and quarterly reports. Each forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any such statement to reflect events or circumstances arising after such date. 19 Table of Contents