FASTENAL CO 10-Q

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks from changes in foreign currency exchange rates, commodity steel pricing, commodity energy prices, and interest rates. Changes in these factors cause fluctuations in our earnings and cash flows. We evaluate and manage exposure to these market risks as follows: Foreign currency exchange rates – Foreign currency fluctuations can affect our net investments, our operations in countries other than the U.S., and earnings denominated in foreign currencies. Historically, our primary exchange rate exposure has been with the Canadian dollar against the United States dollar. We have not historically hedged our foreign currency risk given that exposure to date has not been material. In the first nine months of 2022, changes in foreign currency exchange rates decreased our reported net sales by $22.9 with the estimated effect on our net earnings being immaterial. Commodity steel pricing – We buy and sell various types of steel products; these products consist primarily of different types of threaded fasteners and related hardware. We are exposed to the impacts of commodity steel pricing and our related ability to pass through the impacts to our end customers. Although the price level of steel can vary by geography, for most of the first nine months of 2022, the market price of steel remained broadly elevated. In the third quarter, the market price of steel began to decline from previous peaks in most areas. This trend, should it be sustained, could lead to lower product costs. Traditionally, changes in the cost of input prices are at least partly passed on to customers, although given the length of the supply chain for most products this can take several quarters to occur. As a result, the estimated effect on our net earnings in the first nine mo nths of 2022 was immaterial. Commodity energy prices – We have market risk for changes in prices of oil, gasoline, diesel fuel, natural gas, and electricity. During the first nine months of 2022, the price of energy as reflected in many market indexes increased due to both strong economic activity and the effects of the Ukrainian conflict, which contributed to higher costs for fuel in our vehicles and 24 Table of Contents utilities at our facilities. While energy costs have eased from their peaks during 2022, they remain elevated relative to average costs experienced in the first nine months of 2021. However, based on the fact that total energy exposure is less than 5% of our total net sales, our estimated net earnings exposure for commodity energy prices was immaterial in the first nine months of 2022. Fossil fuels are also often a key feedstock for chemicals and plastics that comprise a key raw material for many products that we sell. As a result, the increase in the cost of oil has resulted in slightly higher costs for certain plastics and resins used in our products. Given the volatility of the current marketplace and the time it takes for higher fossil fuel costs to flow through the supply chain, it is unclear to what degree recent changes in the cost of fossil fuel prices might affect future net earnings. Based on our ability to pass higher input costs on, the estimated effect on our net earnings in the first nine months of 2022 was immaterial. Interest rates - Loans under our Credit Facility bear interest at floating rates. As a result, changes in such rates can affect our operating results and liquidity to the extent we do not have effective interest rate swap arrangements in place. We have not historically used interest rate swap arrangements to hedge the variable interest rates under our Credit Facility. A one percentage point increase to our floating rate debt in the first nine months of 2022 would have resulted in approximately $0.9 of additional interest expense. A description of our Credit Facility is contained in Note 6 of the Notes to Condensed Consolidated Financial Statements.