What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-18 compared with 2022-07-18 · 207 added, 191 removed, 207 unchanged (66% of the section changed)

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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.

References to daily sales rate (DSR) change may reflect either growth (positive) or contraction (negative) for the applicable period.

Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies.

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

We distribute these supplies through a network of approximately 3,300 in-market locations.

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

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Executive Overview

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 following table presents a performance summary of our results of operations for the nine-month and three-month periods ended September 30, 2022 and 2021.

Nine-month Period Three-month Period

2022 2021 Change 2022 2021 Change

Net sales $ 5,285.0 4,479.0 18.0 % $ 1,802.4 1,554.2 16.0 %

Business days 192 191 64 64

Daily sales $ 27.5 23.5 17.4 % $ 28.2 24.3 16.0 %

Gross profit $ 2,447.4 2,064.3 18.6 % $ 826.5 720.2 14.8 %

% of net sales 46.3 % 46.1 % 45.9 % 46.3 %

Operating and administrative expenses $ 1,326.7 1,147.8 15.6 % $ 447.3 401.8 11.3 %

% of net sales 25.1 % 25.6 % 24.8 % 25.9 %

Operating income $ 1,120.7 916.5 22.3 % $ 379.2 318.4 19.1 %

% of net sales 21.2 % 20.5 % 21.0 % 20.5 %

Earnings before income taxes $ 1,111.8 909.3 22.3 % $ 375.3 316.1 18.7 %

% of net sales 21.0 % 20.3 % 20.8 % 20.3 %

Net earnings $ 841.3 693.8 21.3 % $ 284.6 243.5 16.9 %

Diluted net earnings per share $ 1.46 1.20 21.3 % $ 0.50 0.42 17.4 %

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.

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We had an increase in our remaining FTE employee headcount of 199 that relates primarily to personnel investments in information technology, manufacturing, and operational support, such as purchasing and product development.

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.

We opened three branches in the third quarter of 2022 and closed 24 branches, net of conversions.

We activated 92 Onsite locations in the third quarter of 2022 and closed 26, net of conversions.

In any period, the number of closings tends 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

THIRD QUARTER OF 2022 VERSUS THIRD QUARTER OF 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:

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

Three-month Period

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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:

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

Three-month Period

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

Net sales increased $248.2, or 16.0%, in the third quarter of 2022 when compared to the third 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.

We estimate adverse weather that impacted the southeastern U.S.

reduced our quarterly growth by 10 to 30 basis points.

We experienced higher unit sales in the third quarter of 2022 that contributed to the increase in net sales in the period.

This was due to good underlying demand in markets tied to industrial capital goods and commodities, which more than offset softer markets tied to consumer goo ds and relatively lower growth in construction.

Foreign exchange negatively affected sales in the third quarter of 2022 by approximately 60 basis points.

The overall impact of product pricing on net sales in the third quarter of 2022 was 550 to 580 basis points compared to the third quarter of 2021.

The increase is from 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 pricing actions in the third quarter of 2022, and price levels in the market remained stable.

The favorable impact of product pricing moderated in the third quarter of 2022 relative to the second quarter of 2022 due to comparisons against initial price events that began in the third quarter of 2021.

Spot prices in the marketplace for many inputs, particularly fuel, transportation services, and steel, began to decline during the period.

Due to our long supply chain for fasteners and certain non-fastener products, however, it is likely to take several quarters before this is reflected in our cost of goods.

The impact of product pricing on net sales in the third quarter of 2021 was 230 to 260 basis points.

From a product standpoint, we have three categories:

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 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 .

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

The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

Three-month Period % of Sales

Three-month Period

2022 2021 2022 2021

Fasteners 18.2 % 20.2 % 34.1 % 33.4 %

Safety supplies 12.4 % -2.9 % 20.5 % 21.1 %

Other 15.4 % 9.2 % 45.4 % 45.5 %

Our end markets consist of manufacturing, non-residential construction, and other, the latter of which includes resellers, government/education, and transportation/warehousing.

The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

Three-month Period % of Sales

Three-month Period

2022 2021 2022 2021

Manufacturing 22.6% 20.8% 72.9% 68.9%

Non-residential construction 5.2% 10.5% 10.2% 11.3%

Other -1.4% -16.2% 16.9% 19.8%

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 22.9% 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 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.

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.

• 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.

Sales to most of our national account customers grew in the third quarter of 2022 over the year earlier period, as our sales grew at 83 of our Top 100 national account customers.

The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

Three-month Period % of Sales

Three-month Period

2022 2021 2022 2021

National Accounts 20.8 % 16.8 % 58.0 % 56.6 %

Non-National Accounts 9.9 % 2.2 % 42.0 % 43.4 %

Growth Drivers

• We signed 86 new Onsite locations (defined as dedicated sales and service provided from within, or in close proximity to, the customer's facility) in the third quarter of 2022, resulting in year-to-date signings of new Onsite locations of 294.

We had 1,567 active sites on September 30, 2022, which represented an increase of 14.6% from September 30, 2021.

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

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.

We continue to anticipate signing 375 to 400 Onsites in 2022, though we currently expect to be in the lower half of this range given year-to-date signings.

• FMI Technology is comprised of our FA STStock ℠ (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.

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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.

The second statistic is revenue through FMI Technology which combines the sales through FASTStock, FASTBin, and FASTVend.

A portion of the growth in 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.

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

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% of sales 36.9 % 33.0 %

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.

We continue to anticipate weighted FASTBin and FASTVend device signings in 2022 in a range of 21,000 to 23,000 MEUs.

All metrics provided above exclude approximately 7,500 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 eCommerce grew 52.7% in the second quarter of 2022 and represented 17.1% of our total revenues in the period.

Daily sales through eCommerce grew 50.2% in the third quarter of 2022 and represented 18.0% 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).

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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 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 June 30:

Three-month Period

Fasteners 34.6 % 33.6 %

Safety supplies 20.3 % 21.0 %

Other product lines 45.1 % 45.4 %

100.0 % 100.0 %

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.

Our Digital Footprint in the third quarter of 202 2 represented 49.5% of our sales, an increase from 43.7% of sales in the third quarter of 2021.

Our gross prof it, as a percentage of net sales, declined to 45.9% in the third q uarter of 2 022 from 46.3% in the third quarter of 2021.

The decline in our gross profit percentage was primarily related to three factors.

First, the net impact from product and customer mix was dilutive, reflecting relatively strong growth of our Onsite and national account customers, which tend to be larger and have a lower gross margin percentage.

Second, we experienced unfavorable price/cost, reflecting stable pricing for our products and services but slightly higher costs.

Third, we had a $3.4 write down in the value of certain gloves in our inventory.

Demand for nitrile gloves expanded dramatically during the pandemic, and we purchased significant quantities in 2021 to address needs from certain industries.

As market conditions normalized, some of the product had an inventory value above current market value, a situation we did not see reversing.

These impacts were partly offset by strong freight revenue, which narrowed our freight losses, and our ability to leverage organizational expenses.

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.

Our operating and administrative expenses, as a percentage of net sa les, fell to 24.8% in the third quarter of 2022 from 25.9% in the third quarter of 2021.

This was primarily due to a decline, as a percentage of net sales, in occupancy-related and employee-related 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.

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(1) payroll (which includes cash compensation, stock option expense, and profit sharing), (2) health care, (3) personnel development, and (4) social taxes.

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.

In the third quarter of 2022, our employee-relate d expenses increased when com pared to the third 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 and, to a lesser degree, higher average wages.

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

We also had higher profit sharing expense.

These costs were partly offset by lower healthcare expenses reflecting post-COVID normalization of the healthcare environment.

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:

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(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 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.

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

Costs increased related to investment in hardware and equipment, including FMI devices and materials and equipment involved in maintaining and upgrading our branches and hubs.

Total building costs were mostly flat in the period.

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 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.

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

The increase in other operating and administrative expenses relates primarily to higher product movement and fuel costs for our local truck fleet, increased spending on information technology services, and increased spending for travel and supplies.

This was only partly offset by reduced spending for general insurance.

Net Interest Expense

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.

Our net interest expense was $3.9 in the third quarter of 2022, compared to $2.3 in the third quarter of 2021.

This increase was due to higher average debt balances and higher average interest rates during the period.

We recorded income tax expense of $90.7 in the third quarter of 2022, or 24.2% of earnings before income taxes.

Income tax expense was $72.6 in the third quarter of 2021, or 23.0% 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 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.

Our net earnings during the third quarter of 2022 were $284.6, an increase of 16.9% compared to the third quarter of 2021.

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

Liquidity and Capital Resources

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

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

Three-month Period

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Net Cash Provided by Operating Activities

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

We produced operating cash flow of $257.9 in the third quarter of 2022, an increase of 54.1% from the third quarter of 2021, representing 90.6% of the period's net earnings versus 68.8% in the third quarter of 2021.

While the conversion rate in the third quarter of 2022 remains below historical norms for the period, it also represents the first year-over-year improvement in the metric since the first quarter of 2021.

The resources required for operating working capital eased relative to prior periods.

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

September 30 Twelve-month Dollar Change Twelve-month Percentage Change

2022 2021 2022 2022

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Note - Amounts may not foot due to rounding difference.

Our accounts receivable balance increased due to several factors.

The increase in our accounts receivable balance in the third quarter of 2022 is primarily attributable to two factors.

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

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.

The increase in our inventory balance in the third quarter of 2022 is primarily attributable to three factors.

First, our inventory increased to support improved business activity by our customers.

Second, over the past twelve months we have aggressively imported product to deepen our inventory as a means of addressing supply disruptions and provide our customers with resilient and robust product availability.

In the third quarter of 2022, we achieved target product availability in our hubs and experienced easing constraints in our supply chain, which allowed us to slightly shorten our product ordering cycle.

Third, inflation was responsible for slightly less than half of the overall increase.

The impact of inflation remains significant but continues to moderate, with the third quarter being the first quarter in 2022 where inflation was not the primary driver of inventory growth in the period.

Our accounts payable balance increased due to higher product purchases to support the growth of our customers and, to a lesser degree, the favorable impact of timing on certain payable balances.

Net Cash Used in Investing Activities

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.

Net cash used in investing activities decreased by $1.1 in the third quarter o f 2022 when compared to the third quarter of 2021.

This was primarily du e to an increase in our proceeds from sales of property and equipment in the third quarter of 2022 compared to the third quarter of 2021.

Our capital spending will typical ly fall into six categories:

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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 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.

During the third quarter of 2022, our net capital expenditures (purchases of property and equipment net of proceeds from sales of property and equipment) were $44.4, which is a decrease of 2.4% from the third quarter of 2021.

We had higher spending for FMI equipment, information technology, and hub safety and automation upgrades, which was more than offset by lower spending on a new building in downtown Winona, 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.

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.

We now expect our investment in property and equipment, net of proceeds of sales, to be within a range of $170.0 to $190.0 (versus our prior $180.0 to $200.0), an increase from $148.2 in 2021.

This annual increase reflects primarily:

(1) higher spending on FMI equipment in anticipation of higher signings, a deepening of FMI unit inventory to address supply chain risks, and higher unit costs;

(2) an increase in spending on hub properties to reflect upgrades to and investments in automation, as well as facility upgrades;

and (3) an increase in manufacturing capacity to support demand and expand capabilities.

We reduced our range for the full year of 2022 due to slightly lower purchases of FMI devices deriving from our lower signings activity, slightly lower vehicle purchases due to availability constraints, and higher asset sales.

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 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.

Net cash used in financing acti vities increased $30.6 in the third quarter of 2022 when compared to the third quarter of 2021.

This is primarily due to an increase in cash used for dividend payments and to purchase our common stock, which exceeded the increase in our debt obligations.

During the third quarter of 2022, we returned $272.8 to our shareholders in the form of dividends ($177.5) and purchases of our common stock ($95.3), compared to $161.0 in the third quarter of 2021, all in the form of dividends.

During the third quarter of 2022, we purchased 2,000,000 shares of our common stock at an average price of approximately $47.68 per share.

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

We have authority to purchase up to 200,000 additional shares of our common stock under the July 11, 2017 authorization and 8,000,000 additional shares of our common stock under the July 12, 2022 authorization.

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

NINE MONTHS ENDED SEPTEMBER 30, 2022 VERSUS NINE MONTHS ENDED SEPTEMBER 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

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

Nine-month Period

Net sales 100.0 % 100.0 %

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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

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

Nine-month Period

Net sales $ 5,285.0 4,479.0

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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.

Net sales increased $806.0, or 18.0%, in the first nine months of 2022 when compared to the first nine months of 2021.

Adjusted for an extra selling day in the first nine months of 2022, our net daily sales increased 17.4%.

This increase is due to improved unit sales across all major product categories, resulting from continued strength in business activity.

Foreign exchange negatively affected sales in the first nine months of 2022 by approximately 40 basis points.

We estimate that adverse weather reduced our growth by approximately 1 0 basis points during the nine-month period.

The overall impact of product pricing on net sales was 600 to 630 basis points during the first nine 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 .

During the first nine months of 2022, material costs remained elevated while costs for fuel and transportation services accelerated in their inflationary impact.

However, during the third quarter of 2022 we began to see costs for key inputs, such as steel and fuel, decline.

Should that trend be sustained, it could eventually benefit our cost of goods, although given our long supply chain it would likely take several quarters to see such an impact.

The impact of product pricing on net sales was 120 to 150 basis points during the first nine 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.

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

The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

Nine-month Period

2022 2021 2022 2021

Fasteners 21.2 % 17.1 % 34.3 % 33.2 %

Safety supplies 13.8 % -15.0 % 20.6 % 21.2 %

Other 15.7 % 8.1 % 45.1 % 45.6 %

Our end markets consist of manufacturing, non-residential construction, and other, the latter of which includes resellers, government/education, and transportation/warehousing.

The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

Nine-month Period

2022 2021 2022 2021

Manufacturing 23.2% 16.7% 72.0% 68.6%

Non-residential construction 9.8% 2.9% 10.4% 11.2%

Other 2.1% -21.1% 17.6% 20.2%

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.

Sales to most of our national account customers grew in the first nine months of 2022 over the year earlier period, as our sales grew at 92 of our Top 100 national account customers.

The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

Nine-month Period

2022 2021 2022 2021

National Accounts 22.1 % 8.2 % 57.5 % 56.2 %

Non-National Accounts 11.6 % 1.0 % 42.5 % 43.8 %

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

Six-month Period

Nine-month Period

2022 2021 Change

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% of sales 36.0 % 30.9 %

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.

All metrics provided above exclude approximately 7,500 non-wei ghted vending devices that are part of a leased locker program.

Daily sales through eCo mmerce grew 52.6% in the first nine months of 2022 and represented 17.1% of our total revenues in the period.

Our Digital Footprint in the first nine months of 2022 represented 48.2% of our sales, an increase from 41.5% of sales in the first nine months of 2021.

In the first nine months of 2022, our gross profit, as a percentage of net sales, improved to 46.3%, or 20 basis points from 46.1% in the first nine months of 2021.

This was driven by relatively modest changes in a number of variables.

The net effect of write-downs was favorable, as the absence of the $7.8 mask write-down we had in the first quarter of 2021 was more favorable than the $3.4 glove write-down we had in the third quarter of 2022.

We also achieved good leverage over organizational expenses as a result of strong business activity.

These factors more than offset the dilutive impact of customer and product mix and slightly lower product margin as the impact of weaker price/cost for fasteners more than offset strong safety product margins.

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

Our operating and administrative expenses, as a percentage of net sales, fell to 25.1% compared to 25.6% in the first nine months of 2021.

This is almost entirely due to a decline, as a percentage of net sales, in occupancy-related 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

Approximate Percentage of Total Operating and Administrative Expenses Nine-month Period

Employee-related expenses 70% to 75% 17.8 %

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All other operating and administrative expenses 10% to 15% 20.8 %

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

In the first nine months of 2022, our employee-related expenses increased when compared to the first nine 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:

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 period:

In-market locations (branches & Onsites) 11,897 11,337 4.9 %

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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.

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

Total facility costs were flat, with lower costs related to branch rationalization being offset by higher utility expenses.

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

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.

Our net interest expense was $8.9 in the first nine months of 2022, compared to $7.2 in the first nine months of 2021.

We recorded income tax expense of $270.5 in the first nine months of 2022, or 24.3% of earnings before income taxes.

Income tax expense was $215.5 in the first nine months of 2021, or 23.7% of earnings before income taxes.

Our net earnings during the first nine months of 2022 were $841.3, an increase of 21.3% when compared to the first nine months of 2021.

Our diluted net earnings per share where $1.46 during the first nine months of 2022, which increased from $1.20 during the first nine months of 2021.

Liquidity and Capital Resources

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

Six-month Period

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

Nine-month Period

Net cash provided by operating activities $ 639.1 613.7

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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.

We produced operating cash flow of $639.1 in the first nine months of 2022, an increase of 4.1% from the first nine months of 2021, representing 76.0% of the period's net earnings versus 88.5% in the first nine months of 2021.

Growth in operating cash flow was due to higher net income, which more than offset an increased need for working capital to support our customer’s growth as well as inflation in inventory.

The working capital effects were more impactful to our conversion ratio, however, causing that metric to decline over the nine-month period.

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 investing activities increased by $14.6 in the first nine months of 2022 when compared to the first nine months 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 nine months of 2022 compared to in the first nine months of 2021.

During the first nine months of 2022, our net capital expenditures were $120.9, which is an increase of 13.0% from the first nine months of 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.

Net cash used in financing activities increased by $8.0 in the first nine months of 2022 when compared to the first nine months of 2021 .

This is primarily due to an increase in cash used for dividend payments and to purchase our common stock, which exceeded the increase in our debt obligations.

During the first nine months of 2022, we returned $679.0 to our shareholders in the form of dividends ($534.4) and purchases of our common stock ($144.6), compared to $482.6 in the first nine months of 2021, all in the form of dividends.

During the first nine months of 2022, we purchased 3,000,000 shares of our common stock at an average price of approximately $48.22 per share.

We did not purchase any shares of our common stock in the first nine 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.

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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.

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, the impact of inflation on our cost of goods or operating costs, 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.

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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