What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-07-18 compared with 2022-04-18 · 241 added, 118 removed, 157 unchanged (70% of the section changed)

4 unchanged sentences

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.

We distribute these supplies through a network of over 3,200 in-market locations.

Most of our customers are in the manufacturing and non-residential construction markets.

7 unchanged sentences

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.

Net sales increased $270.8, or 18.0%, in the second quarter of 2022 when compared to the second quarter of 2021.

The number of business days were the same in both periods.

Our gross profit increased $127.0, or 18.1%, in the second quarter of 2022 relative to the second quarter of 2021, and as a percentage of net sales was unchanged at 46.5% in the second q uarter of 2 022 from 46.5% in the second quarter of 2021.

Our operating income increased $65.6, or 20.7%, in the second quarter of 2022 relative to the second quarter of 2021, and as a percentage of net sales increased to 21.6% in the second quarter of 2022 from 21.1% in the second quarter of 2021.

Our net earnings during the second quarter of 2022 were $287.1, an increase of 19.8% compared to the second quarter of 2021.

Our diluted net earnings per share were $0.50 during the second quarter of 2022, which increased from $0.42 during th e second 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.

11 unchanged sentences

During the last twelve months, we increased our total FTE employee headcount by 1,270.

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

targeting customer acquisition.

This reflects an increase in our in-market and non-in-market selling FTE employee headcount of 927 to support growth in the marketplace and sales initiatives targeting customer acquisition.

We had an increase in our distribution center FTE employee headcount of 181 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.

We opened two branches in the second quarter of 2022 and closed 25 branches, net of conversions.

We activated 81 Onsite locations in the second quarter of 2022 and closed 20, 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.

SECOND QUARTER OF 2022 VERSUS SECOND QUARTER OF 2021

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:

The following table sets forth condensed consolidated statement of earnings information (as a percentage of net sales) for the periods ended June 30:

Three-month Period

6 unchanged sentences

Note – Amounts may not foot due to rounding difference.

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:

The table below sets forth net sales and daily sales for the periods ended June 30, and changes in such sales from the prior period to the more recent period:

Three-month Period

6 unchanged sentences

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.

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

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.

Net sales increased $270.8, or 18.0%, in the second quarter of 2022 when compared to the second quarter of 2021.

The number of business days were the same in both periods.

The second quarter of 2022 continued to experience strong, economically-driven growth in underlying demand for manufacturing and construction equipment and supplies, which drove higher unit sales that contributed to the increase in net sales in the period.

Foreign exchange negatively affected sales in the second quarter of 2022 by approximately 50 basis points.

The overall impact of product pricing on net sales in the second quarter of 2022 was 660 to 690 basis points compared to the second quarter of 2021.

This reflects actions taken over the past twelve months intended to mitigate the impact of marketplace inflation for our products, particularly fasteners, and transportation services.

We did not take any broad price increases in the second quarter of 2022, but benefited from carryover from actions taken in the first quarter of 2022, the timing of opportunities with national account contracts, and tactical, SKU-level adjustments.

Costs for fuel and transportation services and certain key metals and plastics are at elevated but stable levels.

We will continue to take actions aimed at mitigating the impact of product

and transportation cost inflation should the need arise in 2022.

The impact of product pricing on net sales in the second quarter of 2021 was 80 to 110 basis 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.

fasteners, safety products, and other products, the la tter of which includes eight smaller product categories, such as tools, janitorial supplies, and cutting tools.

Fastener daily sales increased 21.2% over the second quarter of 2021, and represented 34.6% of our net sales in the second quarter of 2022;

fasteners represented 33.6% of net sales in the second quarter of 2021.

Safety product daily sales increased 13.8% over the second quarter of 2021 and represented 20.3% of our net sales in the second quarter of 2022;

safety products represented 21.0% of net sales in the second quarter of 2021.

Other products daily sales increased 17.0% over the second quarter of 2021 and represented 45.1% of our net sales in the second quarter of 2022;

other products represented 45.4% of net sales in the second quarter of 2021.

From an end market standpoint, daily sales to our manufacturing customers increased 23.1% in the second quarter of 2022 from the second quarter of 2021.

Daily sales to our non-residential construction c ustomers increased 10.8% in t he second quarter of 2022 from the second 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 .

Sales to government customers, which includes health care provid ers, decreased 2.1% and represented 3.8% of sales in the second quarter of 2022, down from 4.6% in the second 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.

Daily sales to our national account customers increased 22.9% in the second quarter of 2022 over the second quarter of 2021.

Most of our national account customers grew in the second quarter of 2022 over the year earlier period, as our sales grew at 91 of our Top 100 national account customers.

Revenues attributable to national account customers represented 57.3% 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.

Daily sales to our non-national account customers, which includes government customers, increased 12.2% in the second quarter of 2022 from the second quarter of 2021.

Revenues attributable to non-national account customers represented 42.7% of our total revenues in the period.

2 unchanged sentences

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.

• We signed 102 new Onsite locations (defined as dedicated sales and service provided from within, or in close proximi ty to, the customer's facility) in the second quarter of 2022, resulting in year-to-date signings of new Onsite locations of 208.

We had 1,501 active sites on June 30, 2022, which represented an increase of 13.5% from June 30, 2021.

Daily sales through our Onsite locations, excluding sales transferred from branches to new Onsites, grew at a better than 20% rate in the second quarter of 2022 over the second 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.

The signi ngs through the first half of 2022 keeps us on track to sign 375 to 400 Onsites in 2022.

• FMI Technology is comprised of our FASTStock ℠ (scanned stocking locations), FASTBin ® (infrared, RFID, and scaled bins), and FASTVend ® (vending devices) offering.

21 unchanged sentences

% of sales 35.6 % 30.7 %

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.

We began disclosing the above table in the second quarter of 2021 using sales after rebates (net sales).

In the third quarter of 2021, we updated our process to reflect sales before rebates (sales) to ensure consistency across our FMI and Digital Footprint reporting.

The second quarter of 2021 percent of sales figures above and our digital footprint below, may differ slightly from those disclosed in the second quarter of 2021 based on this minor change in reporting.

Our signings of FMI devices in the second quarter and year-to-date 2022 have improved slightly on a sequential basis, but at a slower pac e than is necessary to achieve our annual goals.

As a result, we currently expect our 2022 signings goal for weighted FASTBin and FASTVend devices to be 21,000 to 23,000 MEUs, a reduction from our previous goal of 23,000 to 25,000 MEUs.

All metrics provided above exclude ap proximately 9,000 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).

Daily sales through eCommerce grew 52.7% in the second quarter of 2022 and represented 17.1% of our total revenues in the period.

Our d igital 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.

Our Digital Footprint in the second quarter of 202 2 represented 47.9% of ou r sales, a n increase from 41.4% of sales in the second 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:

The approximate mix of sales from fasteners, safety supplies, and all other product lines was as follows for the periods ended June 30:

Three-month Period

3 unchanged sentences

100.0 % 100.0 %

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.

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.

Our gross prof it, as a percentage of net sales, was unchanged at 46.5% in the second q uarter of 2 022 from 46.5% in the second quarter of 2021.

We experienced a modest decline in product margin, due in part to a greater dilutive net impact from product and customer mix, which was largely offset by better leverage of organizational expenses as a result of strong business activity.

The impact of price/cost was largely neutral to our gross profit percentage in the second quarter of 2022.

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.

Our operating and administrative expenses, as a percentage of net sa les, fell to 25.0% in the second quarter of 2022 from 25.4% in the second quarter of 2021.

A decline, as a percentage of net sales, in occupancy-related and employee-related expenses was only partly offset by an increase, as a percentage of net sales, in 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.

5 unchanged sentences

(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.

In the second quarter of 2022, our employee-relate d expenses increased when com pared to the second quarter of 2021.

We experienced an increase in employee base pay, albeit at a rate below the growth in sales, due to higher average FTE during the period, a greater proportion of full-time employees in our labor pool, and, to a lesser degree, higher average wages.

Bonus and commission payments and profit sharing increased at a rate greater than sales, ref lecting improved business activity and financial performance versus the year-ago period.

This was partly of fset by lower healthcare expenses reflecting reduced COVID-related costs.

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:

4 unchanged sentences

Manufacturing 672 656 2.4 % 618 8.7 %

Organizational support personel (1)

Organizational support personnel (1)

1,641 1,605 2.2 % 1,533 7.0 %

7 unchanged sentences

(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).

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.

In the second quarter of 2022, our occupancy-related expenses increased when compared to the second quarter of 2021.

Building expense declined, reflecting lower branch-related expenses.

Costs related to investment in hardware and equipment, including FMI and maintenance of hub and branch equipment, increased to support growth, albeit at a rate below our sales growth.

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.

Combined, all other operating and administrative expenses increased in the second quarter of 2022 when compared to the second quarter of 2021.

The increase i n other operating and administrative expenses relates primarily to higher product movement and fuel costs for our local truck fleet, exp enses from our customer show, and increased spending for travel and supplies.

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.

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.

Our net interest expense was $2.7 in the second quarter of 2022, compared to $2.6 in the second quarter of 2021.

We recorded income tax expense of $93.6 in the second quarter of 2022, or 24.6% of earnings before income taxes.

Income tax expense was $75.5 in the second quarter of 2021, or 24.0% 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%.

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.

Our net earnings during the second quarter of 2022 were $287.1, an increase of 19.8% compared to the second quarter of 2021.

Our diluted net earnings per share were $0.50 during the second quarter of 2022, which increased from $0.42 during th e second quarter of 2021.

Liquidity and Capital Resources

Cash flow activity was as follows for the periods ended March 31:

Cash flow activity was as follows for the periods ended June 30:

Three-month Period

6 unchanged sentences

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.

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

We produced operating cash flow of $151.2 in the second quarter of 2022, a decrease of 11.8% from the second quarter of 2021, representing 52.7% of the period's net earnings versus 71.6% in the second quarter of 2021.

Second quarters traditionally have lower conversion rates due to the timing of tax payments.

However, in the second quarter of 2022, cash flow was also affected by higher working capital assets, which reflected significant product cost inflation and efforts to support customer growth.

The dollar and percentage change in accounts receivable, net, inventories, and accounts payable as of June 30, 2022 when compared to June 30, 2021 were as follows:

June 30 Twelve-month Dollar Change Twelve-month Percentage Change

2022 2021 2022 2022

6 unchanged sentences

Note - Amounts may not foot due to rounding difference.

Our accounts receivable bala nce increased due to several factors.

Our accounts receivable balance 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.

Second, we continue to experience a shift in our mix due to relatively stronger growth from national account customers, which tend to be larger and carry longer payment terms than our non-national account customers.

The increase in our inventory balance is primarily attributable to two items.

First, we experienced an increase in the physical quantity of stocked product as we support our customers growth and supply chain needs.

Second, we experienced significant inflation that increased the cost of our inventory.

These two factors each accounted for roughly half of the increase in our total inventory balance.

The proportion of our inventory gain accountable to inflation has moderated over the last few quarters reflecting stability of product costs at elevated levels and rising availability in our hubs.

The latter represents our commitment to providing a resilient and robust supply chain as our customers expand production, as well as deeper inventory stocking due to disruptions in supply chains.

Our accounts payable balance increased due to higher product purchases to support the growth of our 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.

Net cash used in investing ac tivities increased by $12.4 in the second quarter o f 2022 when compared to the second 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 second quarter of 2022 compared to the second quarter of 2021.

Our capital spending will typical ly fall into six categories:

1 unchanged sentence

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.

During the second quarter of 2022, our net capital expenditures were $43.4, which is an increase of 37.8% from the second quarter of 2021.

The most significant areas driving this increase are higher spending on hub safety and automation upgrades and on FMI equipment, only partly offset by lower spending on a new building in downtown Winona, which was completed in 2021.

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.

1 unchanged sentence

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

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.

In addition to capital expenditures, material cash requirements for known contractual 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.

Net cash used in financing activities decreased $67.9 in the second quarter of 2022 when compared to the second quarter of 2021.

This is primarily due to an increase in debt obligations, which exceeded the increase in the capital used for the payment of dividends and the purchase of our common stock in the second quarter of 2022 compared to in the second quarter of 2021.

During the second quarter of 2022, we returned $227.8 to our shareholders in the form of dividends ($178.5) and purchases of our common stock ($49.3), compared to $160.8 in the second quarter of 2021, all in the form of dividends.

During the second quarter of 2022, we purchased 1,000,000 shares of our common stock at an average price of approximately $49.29 per share.

We did not purchase any shares of our common stock in the second quarter of 2021.

We have authority to purchase up to 2,200,000 additional shares of our common stock under the July 11, 2017 authorization.

On July 12, 2022, the board of directors of the company authorized repurchases by the company of up to an additional 8,000,000 shares of its common stock.

These authorizations do not have an expiration date.

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.

SIX MONTHS ENDED JUNE 30, 2022 VERSUS SIX MONTHS ENDED JUNE 30, 2021

Results of Operations

The following table sets forth condensed consolidated statement of earnings information (as a percentage of net sales) for the periods ended June 30:

Six-month Period

Net sales 100.0 % 100.0 %

Gross profit 46.5 % 46.0 %

Operating and administrative expenses 25.3 % 25.5 %

Operating income 21.3 % 20.5 %

Net interest expense -0.1 % -0.2 %

Earnings before income taxes 21.2 % 20.3 %

Note – Amounts may not foot due to rounding difference.

The table below sets forth net sales and daily sales for the periods ended June 30, and changes in such sales from the prior period to the more recent period:

Six-month Period

Net sales $ 3,482.6 2,924.7

Percentage change 19.1 % 1.7 %

Business days 128 127

Daily sales $ 27.2 23.0

Percentage change 18.1 % 2.5 %

Daily sales impact of currency fluctuations -0.3 % 0.9 %

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 $557.8, or 19.1%, in the first six months of 2022 when compared to the first six months of 2021.

Adjusted for one more selling day in the first six months of 2022, our net daily sales increased 18.1%.

This increase is due to improved unit sales across most products, resulting from continued strength in business activity.

Foreign exchange negatively affected sales in the first six months of 2022 by approximately 30 basis points.

The overall impact of product pricing on net sales was 620 to 650 basis points during the first six months of 2022.

This increase reflects actions taken as part of our strategy to mitigate the impact of marketplace inflation for our products and services, particularly fasteners, and transportation services.

During the first six months of 2022, costs for fuel and transportation services accelerated in their inflationary impact.

We will continue to take actions aimed at mitigating the impact of product and

transportation cost inflation as the need arises in 2022.

The impact of product pricing on net sales was 70 to 100 basis points during the first six months of 2021 .

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 22.8% over the first six months of 2021, and represented 34.4% of our net sales in the first six months of 2022;

fasteners represented 33.1% of net sales in the first six months of 2021.

S afet y product daily sales increased 14.5% over the first six months of 2021 and represented 20.7% of our net sales in the first six months of 2022;

safety products represented 21.3% of net sales in the first six months of 2021.

Other products daily sales increased 15.9% over the first six months of 2021 and represented 44.9% of our net sales in the first six months of 2022;

other products represented 45.6% of net sales in the first six months of 2021.

From an end market standpoint, daily sales to our manufacturing customers increased 23.5% in the first six months of 2022 from the first six months of 2021.

Daily sales to our non-residential construction customers increased 12.3% in the first six months of 2022 from the first six months 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 4.2% and was 4.1% of sales in the first six months of 2022, down from 5.0% in the first six months 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 six months of 2022 over the the first six months of 2021.

Most of our national account customers grew in the first six months 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 57.2% of our total revenues in the first six months of 2022.

Daily sales to our non-national account customers, which includes government customers, increased 12.6% in the first six months of 2022 from the first six months of 2021.

Revenues attributable to non-national account customers represented 42.8% of our total revenues in the the first six months of 2022.

The table below summarizes the signings and installations of, and sales through, our FMI devices.

Six-month Period

2022 2021 Change

Weighted FASTBin/FASTVend signings (MEUs) 10,818 10,526 2.8 %

Signings per day 85 83

Weighted FASTBin/FASTVend installations (MEUs;

end of period) 96,872 87,567 10.6 %

FASTStock sales $ 405.8 251.0 61.7 %

% of sales 11.5 % 8.5 %

FASTBin/FASTVend sales $ 845.3 628.7 34.5 %

% of sales 24.0 % 21.3 %

FMI sales $ 1,251.1 879.7 42.2 %

FMI daily sales $ 9.8 6.9 41.1 %

% of sales 35.5 % 29.8 %

All metrics provided above exclude ap proximately 9,000 non-wei ghted vending devices that are part of a leased locker program.

Daily sales through eCo mmerce grew 54.0% in the first six months of 2022 and represented 16.6% of our total revenues in the period.

Our Digital Footprint in the first six months of 2022 represented 47.5% of our sales, a n increase from 40.3% of sales in the first six months 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 June 30:

Six-month Period

Fasteners 34.4 % 33.1 %

Safety supplies 20.7 % 21.3 %

Other product lines 44.9 % 45.6 %

100.0 % 100.0 %

In the first six months of 2022, our gross profit, as a percentage of net sales, improved to 46.5%, or 50 basis points from 46.0% in the first six months of 2021.

This was driven by a number of factors.

First, approximately half of the increase in gross profit percentage during this period is due to the absence in the first quarter of 2022 of a $7.8 write-down of mask inventories that we incurred in the first quarter of 2021.

Second, product margins improved slightly, primarily due to a higher gross profit percentage realized in our safety products.

This was a result of the margin of COVID-related products returning to pre-pandemic levels.

The period did not have the large, multi-quarter commitments to supply COVID supplies, generally at a lower margin, that existed in the preceding period.

This was more than offset by slightly lower fastener product margins.

The impact of price/cost was largely neutral to our gross profit percentage in the first half of 2022.

Operating and Administrative Expenses

Our operating and administrative expenses, as a percentage of net sales, fell to 25.3% compared to 25.5% in the first six months of 2021.

A decline, as a percentage of net sales, in occupancy-related expenses more than offset slight increases, as a percentage of net sales, in employee-related and 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 Six-month Period

Employee-related expenses 70% to 75% 19.8 %

Occupancy-related expenses 15% to 20% 3.3 %

All other operating and administrative expenses 10% to 15% 30.0 %

In the first six months of 2022, our employee-related expenses increased when compared to the first six months of 2021.

We experienced a significant increase in bonus and commission payments, including as a percentage of net sales, based on our improved operating and financial performance over the period.

We also experienced an increase in base pay, although at a rate below our growth in net sales, related to higher average FTE over the period, a shift in mix toward full-time labor, and higher wages.

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:

In-market locations (branches & Onsites) 12,039 11,337 6.2 %

Non-in-market selling 2,299 2,076 10.7 %

Selling subtotal 14,338 13,413 6.9 %

Distribution/Transportation 2,872 2,740 4.8 %

Manufacturing 672 619 8.6 %

Organizational support personnel (1)

1,641 1,598 2.7 %

Non-selling subtotal 5,185 4,957 4.6 %

Total 19,523 18,370 6.3 %

(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.

In the first six months of 2022, our occupancy-related expenses increased when compared to the first six months of 2021.

This was primarily related to an increase in expenses for FMI technology to support growth in our business as well as higher costs to maintain and upgrade facility equipment.

Total facility costs were flat, with lower combined branch and non-branch costs due to branch rationalizations, which were offset by higher utility expenses.

Combined, all other operating and administrative expenses increased in the first six months of 2022 when compared to the first six months of 2021.

The most significant contributors to this increase were higher selling-related transportation expenses to support growth and as a result of higher fuel costs, higher costs related to travel and supplies, and higher general insurance costs.

Net Interest Expense

Our net interest expense was $4.9 in the first six months of 2022, compared to $5.0 in the first six months of 2021.

We recorded income tax expense of $179.8 in the first six months of 2022, or 24.4% of earnings before income taxes.

Income tax expense was $142.8 in the first half of 2021, or 24.1% of earnings before income taxes.

Our net earnings during the first six months of 2022 were $556.7, an increase of 23.6% when compared to the first six months of 2021.

Our diluted net earnings per share where $0.96 during the first six months of 2022, which increased from $0.78 during the first six months of 2021.

Liquidity and Capital Resources

Cash flow activity was as follows for the periods ended June 30:

Six-month Period

Net cash provided by operating activities $ 381.2 446.3

Percentage of net earnings 68.5 % 99.1 %

Net cash used in investing activities $ 77.1 61.4

Percentage of net earnings 13.8 % 13.6 %

Net cash used in financing activities $ 285.4 308.0

Percentage of net earnings 51.3 % 68.4 %

Net Cash Provided by Operating Activities

We produced operating cash flow of $381.2 in the first six months of 2022, a decrease of 14.6% from the first six months of 2021, representing 68.5% of the period's net earnings versus 99.1% in the first six months 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 customers 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 contributed.

National accounts continue to grow in our sales mix, and these customers tend to be larger and have longer payment terms.

These impacts were only partly offset by growth in profits.

Net Cash Used in Investing Activities

Net cash used in investing acti vi t ies increased by $15.7 in the first six months of 2022 when compared to the first six months 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 six months of 2022 compared to in the first six months of 2021.

During the first six months of 2022, our net capital expenditures were $76.5, which is an increase of 24.4% from the first six months of 2021.

The most significant areas driving this increase are higher spending on hub safety and automation upgrades, FMI equipment, and information technology, only partly offset by lower spending on a new building in downtown Winona, which was completed in 2021.

Net Cash Used in Financing Activities

Net cash used in financing activities decreased by $22.6 in the first six months of 2022 when compared to the first six months of 2021 .

This is primarily due to an increase in debt obligations, which more than offset our increased use of capital for the payment of dividends and purchases of our common stock in the first six months of 2022 compared to the first six months of 2021.

During the first six months of 2022, we returned $406.2 to our shareholders in the form of dividends ($356.9) and purchases of our common stock ($49.3), compared to $321.6 in the first six months of 2021, all in the form of dividends.

During the first six months of 2022, we purchased 1,000,000 shares of our common stock at an average price of approximately $49.29 per share.

We did not purchase any shares of our common stock in the first six months of 2021.

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.

11 unchanged sentences

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-Q

Item 2. Management’s Discussion and Analysis