What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-07 compared with 2022-02-07 · 425 added, 302 removed, 309 unchanged (70% of the section changed)

1 unchanged sentence

The following is management's discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements and should be read in conjunction with those consolidated financial statements.

This section of this 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

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

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

This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons for the current year and the prior year.

Discussions of 2020 items can be found in 'Management's Discussion and Analysis of Financial Condition and Results of Operations' in Part II, Item 7 of our annual report on Form 10-K for the fiscal year ended December 31, 2021.

Business and Operational Overview

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.

The manufacturing market includes sales of products for both original equipment manufacturing (OEM), where our products are consumed in the final products of our customers, and manufacturing, repair and operations (MRO), where are products are consumed to support the facilities and ongoing operations of our customers.

The manufacturing market includes sales of products for both original equipment manufacturing (OEM), where our products are consumed in the final products of our customers, and manufacturing, repair and operations (MRO), where our products are consumed to support the facilities and ongoing operations of our customers.

The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors.

Other users of our products include farmers, truckers, railroads, oil exploration companies, oil production and refinement companies, mining companies, federal, state, and local governmental entities, schools, and certain retail trades.

Geographically, our branches, Onsite locations, and customers are primarily located in North America.

Geographically, our branches, Onsite locations, and customers are primarily located in North America, though we continue to grow our non-North American presence as well.

It is helpful to appreciate several aspects of our marketplace:

(1) It's big.

First, it is big.

We estimate the North American marketplace for industrial supplies is in excess of $140 billion per year (and we have expanded beyond North America) and no company has a significant portion of this market.

(2) Many of the products we sell are individually inexpensive, but the cost and time to manage, procure, and transport these products can be quite meaningful.

(3) Purchasing professionals often expend disproportionate effort managing the high stock keeping unit (SKU) count of low-volume, low value MRO supplies which is better allocated to their higher volume, higher value OEM supplies.

(4) Many customers prefer to reduce their number of suppliers to simplify their business, while also utilizing various technologies and models (including our local branches when they need something quickly or unexpectedly) to improve availability and reduce waste.

(5) We believe the markets are efficient.

Second, many of the products we sell are individually inexpensive, but the cost and time to manage, procure, and transport these products can be quite meaningful.

Third, many customers prefer to reduce their number of MRO and OEM suppliers to simplify their business, while also utilizing various technologies and models (including our local branches when they need something quickly or unexpectedly) to improve availability and reduce waste.

Lastly, we believe the markets are efficient.

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

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

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

The concept of growth is simple:

11 unchanged sentences

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

Impact of COVID-19 on Our Business

In the second quarter of 2020, the impacts of the COVID-19 pandemic on our business were dramatic in two respects.

First, local and national actions taken, such as stay-at-home mandates, reduced business activity sharply as many customers either closed their locations or operated at significantly diminished capacity.

This effect was illustrated in a significant decline in sales for our fastener products.

Second, social actions taken to mitigate the effects of the pandemic produced significant demand for personal protection equipment (PPE) and sanitation products, generating significant sales of such products not only to certain traditional customers but also to state and local government entities as well as front line responders.

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

During that period, improved sales of PPE and sanitation products

more than offset the general economic weakness.

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

The pandemic continued to have a significant impact on our business in the third and fourth quarters of 2020.

The marketplace broadly, and Fastenal specifically, continued to operate with certain modifications to balance re-opening with employee and customer safety.

However, most of the markets in which we operate began to normalize in the second half of 2020.

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

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

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

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

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

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

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

companies navigated the pandemic mostly without curtailing operations.

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

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

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

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

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

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

These precautions allowed our operations to continue to function effectively.

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

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

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

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

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

an inability to meet delivery requirements and commitments;

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

limitations on the ability of carriers to deliver our products to customers;

limitations on the ability of our customers to conduct their business and purchase our products and services;

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

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

While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources, we believe that it is important to share where our company stands today, how our response to COVID-19 is progressing, and how our operations and financial condition may change as the fight against COVID-19 progresses.

Executive Overview

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

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

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

Our net earnings in 2021 were $925.0, an increase of 7.7% when compared to 2020.

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

The year 2021 was marked by a number of trends.

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

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

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

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

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

expected under normal business conditions.

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

The following table presents a performance summary of our results of operations for the periods ended December 31:

2022 2021 YOY

Change 2020 YOY

Net sales $ 6,980.6 6,010.9 16.1 % $ 5,647.3 6.4 %

Business days 254 253 255

Daily sales $ 27.5 23.8 15.7 % $ 22.1 7.3 %

Gross profit $ 3,215.8 2,777.2 15.8 % $ 2,567.8 8.2 %

% of net sales 46.1 % 46.2 % 45.5 %

Operating and administrative expenses $ 1,762.2 1,559.8 13.0 % $ 1,426.0 9.4 %

% of net sales 25.2 % 26.0 % 25.3 %

Operating income $ 1,453.6 1,217.4 19.4 % $ 1,141.8 6.6 %

% of net sales 20.8 % 20.3 % 20.2 %

Earnings before income taxes $ 1,440.0 1,207.8 19.2 % $ 1,132.7 6.6 %

% of net sales 20.6 % 20.1 % 20.1 %

Net earnings $ 1,086.9 925.0 17.5 % $ 859.1 7.7 %

Diluted net earnings per share $ 1.89 1.60 17.8 % $ 1.49 7.4 %

We would characterize 2022 as reflecting the normalization of the business cycle relative to the pandemic-impacted years of 2020 and 2021.

While we did experience some slowing in business activity over the course of the year, customer demand was generally healthy throughout, resulting in good unit growth.

Incremental pricing from actions taken at the end of 2021 and the start of 2022 further contributed to our growth, though over the course of the year we saw the inflationary pressures and supply chain constraints that catalyzed our pricing actions largely dissipate.

This normalization in business activity also resulted in improved signings of Onsites and FMI devices, which approached pre-pandemic levels.

These factors more than offset challenges in our smaller non-North American markets, where the effects of the Russo-Ukrainian War and China's evolving COVID-19 policies weighed on growth.

This growth, combined with improvements to our efficiency stemming from growth in our Digital Footprint and changes to our go-to-market strategies, allowed us to expand our operating margins in the period.

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

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

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

2021 Twelve-month

4 unchanged sentences

Total FTE employee headcount (1)

19,854 18,334 8.3 %

Number of branch locations 1,683 1,793 -6.1 %

3 unchanged sentences

102,151 92,874 10.0 %

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

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

Due to a calculation error, organizational support personnel was overstated by 36 FTE in the fourth quarter of 2021, with total non-selling FTE and total FTE being overstated by the same amount.

These figures have been corrected in this Form 10-K.

Adjusting for this error, total FTE in 2021 would have been down by an additional 0.2% for year-to-date growth.

This number excludes approximately 6,500 non-weighted devic es that are part of our locker lease program.

During the last twelve months, we increased our total FTE employee headcount by 1,520.

This reflects an increase in our in-market and non-in-market selling FTE employee headcount of 1,063 to support growth in the marketplace and sales initiatives targeting customer acquisition.

We had an increase in our distribution center FTE employee headcount of 231 to support increasing product throughput at our facilities and to expand our local inventory fulfillment terminals (LIFTs).

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

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

increase in our remaining FTE employee headcount of 226 that relates primarily to personnel investments in information technology, manufacturing, and operational support, such as purchasing and product development.

We opened one branch in the fourth quarter of 2022 and closed 34, net of conversions.

We activated 76 Onsite locations in the fourth quarter of 2022 and closed 20, net of conversions.

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

In 2022, we opened 12 branches and closed 122, net of conversions.

In 2022, we activated 306 Onsite locations and closed 99, 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.

In any period, the number of closings tends to reflect 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.

CURRENT YEAR RESULTS ENDED 2022

Results of Operations

The following sets forth consolidated statements of earnings information (as a percentage of net sales) for the periods ended December 31:

2021 2020 2019

Net sales 100.0 % 100.0 %

7 unchanged sentences

The table below sets forth net sales and daily sales for the periods ended December 31, and changes in such sales from the prior period to the more recent period:

Net sales $ 6,980.6 6,010.9

Percentage change 16.1 % 6.4 %

Business days 254 253

Daily sales $ 27.5 23.8

Percentage change 15.7 % 7.3 %

Daily sales impact of currency fluctuations -0.5 % 0.6 %

The increase in net sales noted above for 2022 was due to higher unit sales of MRO and OEM supplies to traditional manufacturing and construction customers and higher pricing as further set forth below.

Higher unit sales in 2022 were a result of healthy economic activity throughout the period, though we did observe some moderation in demand as the year progressed.

This moderation in demand, combined with more difficult year-over-year comparisons as the year progressed, produced daily sales growth of 18.1% in the first half of 2022, daily sales growth of 13.3% in the second half of 2022, and daily sales growth of 8.0% in December 2022.

Growth was led by our manufacturing customers, with particular strength in markets involved with commodity and capital goods production.

Our non-residential construction customers grew on an annual basis, but turned slightly negative in the fourth quarter.

We believe the relative underperformance of this customer category reflects deliberate shifts in our branch strategy that de-emphasized walk-in and over-the-counter transactions.

We also experienced a normalization in other aspects of the operating environment in 2022, specifically the dissipation or moderation over the course of the year of product and transportation inflation, supply chain disruption, and labor market constraints.

This affected two aspects of our growth during the period.

First, price contributed 540 to 570 basis points to our net sales growth in 2022.

However, as inflationary pressures eased and product availability improved, the need for aggressive pricing actions declined.

The absence of such actions combined with more difficult year-over-year comparisons as the year progressed resulted in the contribution from price to net sales growth moderating, from averaging 620 to 650 basis points in the first half of 2022, to averaging 450 to 480 basis points in the second half of 2022 and to averaging 350 to 380 basis points in the fourth quarter of 2022.

Second, as inflationary pressures and supply chain constraints became more predictable and manageable and then largely dissipated, it allowed our customers to shift from short-term business management to long-term strategic planning.

This, in turn, provided us more opportunities to engage with customers over our key growth drivers, including Onsite and FMI.

As a result, while we did not reach the signings goals we had set out at the start of the year, we saw a meaningful increase in signings in 2022 over the prior year, and a return to near pre-pandemic levels.

We signed 356 Onsites in 2022, below our goal of 375 to 400 units but above the prior year (274 signings).

Similarly, we signed 20,735 FMI MEUs, below our goal of 23,000 to 25,000 MEUs but above the prior year (19,311 MEUs).

Sales by Product Line

The approximate mix of sales from fasteners, safety supplies, and all other product lines was as follows:

Fasteners 34.0% 33.3%

Safety supplies 20.8% 21.2%

Other product lines 45.2% 45.5%

The shifts in product mix in 2022 compared to 2021 largely reflect the reversal of pandemic-related activity combined with the relative growth of our more cyclical fastener line as growth in manufacturing and construction end markets accelerated as the post-pandemic North American economy recovered.

Annual Sales Changes, Sequential Trends, and End Market Performance

This section focuses on three distinct views of our business – annual sales changes by month, sequential trends, and end market performance.

The first discussion regarding sales changes by month provides a good mechanical view of our business.

The second discussion provides a framework for understanding the sequential trends (that is, comparing a month to the immediately preceding month, and also looking at the cumulative change from an earlier benchmark month) in our business.

Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.

Annual Sales Changes, by Month

During the months noted below, all of our selling locations, when combined, had a DSR change of (compared to the same month in the preceding year):

May June July Aug.

2022 14.9 % 21.3 % 19.1 % 20.3 % 17.6 % 16.0 % 18.1 % 16.1 % 13.7 % 13.6 % 10.2 % 8.0 %

2021 6.5 % 1.5 % 7.5 % 1.2 % -3.2 % 1.7 % 9.7 % 9.0 % 11.1 % 14.1 % 13.2 % 16.5 %

Sequential Trends

We find it helpful to think about the monthly sequential changes in our business using the analogy of climbing a stairway – This stairway has several predictable landings where there is a pause in the sequential gain (i.e.

April, July, and October to December), but generally speaking, climbs from January to October.

The October landing then establishes the benchmark for the start of the next year.

History has identified these landings in our business cycle.

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

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

The holidays we noted impact the trends because they either move from month-to-month or because they move around during the week.

The table below shows the pattern to the sequential change in our daily sales.

The line labeled 'Benchmark' is a historical average of our sequential daily sales change for the trailing five year average that excludes 2020.

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

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

The '2022' and '2021' lines represent our actual sequential daily sales changes.

The '22Delta' and '21Delta' lines indicate the difference between the 'Benchmark' and the actual results in the respective year.

Under normal circumstances, the sequential trends shown below are directly linked to fluctuations in our end markets.

Further, in any given month it is possible to get significant deviation from the benchmark.

It is important to note that these benchmarks are historical averages.

In a year where demand is strong, our daily sales growth rates will tend to have more months that exceed the benchmark than fall below it.

In a year where demand is weak, we will tend to have more months that fall short of the benchmark than exceed it.

In both cases, there is a random element that makes it difficult to know how any single month will perform.

May June July Aug.

Cumulative Change from Jan.

Benchmark (2)

-0.1 % 0.8 % 3.4 % 0.1 % 2.2 % 1.9 % -3.3 % 3.1 % 3.4 % -2.1 % 9.5 %

2022 1.7 % 3.1 % 3.6 % -1.2 % 3.2 % 0.2 % -1.6 % 1.3 % 2.7 % -0.1 % 11.7 %

22Delta 1.7 % 2.4 % 0.2 % -1.3 % 1.1 % -1.7 % 1.6 % -1.8 % -0.7 % 2.0 % 2.2 %

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

21Delta 1.0 % -3.0 % 2.2 % -2.3 % 3.4 % -0.3 % -0.2 % 0.0 % 1.5 % 2.1 % 3.5 %

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

The benchmark for each month is the average of the previous five years for that month.

As COVID-19-related surge sales made sequential averages in 2020 unrepresentative, the benchmark uses a preceding five-year average that excludes 2020.

We also exclude the impact of the 2017 Mansco acquisition.

Note – Amounts may not foot due to rounding difference.

A graph of the sequential daily sales change patterns discussed above, starting with a base of '100' in the previous October and ending with the next October, would be as follows:

End Market Performance

We estimate approximately 70% of our business is with customers engaged in some type of manufacturing, a significant subset of which finds its way into the heavy equipment market.

The DSR change to these manufacturing customers, when compared to the same period in the prior year, was as follows:

DSR change - manufacturing customers Q1 Q2 Q3 Q4 Annual

2022 23.9 % 23.1 % 22.6 % 16.0 % 21.3 %

2021 5.6 % 24.5 % 20.8 % 23.8 % 18.4 %

Our manufacturing business consists of two subsets:

the industrial production business (this is business where we supply products that become part of the finished goods produced by our customers and is sometimes referred to as OEM - original equipment manufacturing) and the maintenance portion (this is business where we supply products that maintain the facility or the equipment of our customers engaged in manufacturing and is sometimes referred to as MRO - maintenance, repair, and operations).

The industrial business is more fastener-centered, while the maintenance portion is represented by all product categories.

The best way to understand the change in our industrial production business is to examine the results in our fastener product line (which, under normal business conditions, represents 30% to 35% of our business) which is heavily influenced by changes in our business with heavy equipment manufacturers.

From a company perspective, the DSR change of fasteners, when compared to the same period in the prior year, was as follows (note:

this information includes all end markets):

DSR change - fasteners Q1 Q2 Q3 Q4 Annual

2022 24.6 % 21.2 % 18.2 % 9.1 % 18.1 %

2021 4.0 % 28.4 % 20.2 % 24.2 % 18.8 %

By contrast, the best way to understand the change in the maintenance portion of the manufacturing business is to examine the results in our non-fastener product lines.

From a company perspective, the DSR change of non-fasteners, when compared to the same period in the prior year, was as follows (note:

this information includes all end markets):

DSR change - non-fasteners Q1 Q2 Q3 Q4 Annual

2022 15.0 % 16.0 % 14.4 % 11.6 % 14.2 %

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

Two product lines, safety and janitorial, accounted for approximately 44% of total non-fastener sales in 2022.

The pattern in 2021, and particularly the second quarter of 2021, was affected by difficult comparisons versus the prior year, when the onset of the COVID-19 pandemic resulted in a surge of safety and janitorial supplies that was not repeated to the same degree in 2022.

Setting aside the unique circumstances surrounding the pandemic, our non-fastener business is not immune to the impact of industrial cycles.

However, we would typically expect it to outperform our fastener business over the course of a cycle.

This reflects three things:

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

We estimate approximately 15% to 20% of our business is with customers engaged in non-residential construction and reseller markets.

The DSR change to these customers, when compared to the same period in the prior year, was as follows:

DSR change - non-residential construction and reseller customers Q1 Q2 Q3 Q4 Annual

2022 10.3 % 8.0 % 4.6 % -1.6 % 5.3 %

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

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

In 2022, these markets were healthy, which contributed to growth with these customers.

The gross profit percentage during each period was as follows:

Q1 Q2 Q3 Q4 Annual

2022 46.6 % 46.5 % 45.9 % 45.3 % 46.1 %

2021 45.4 % 46.5 % 46.3 % 46.5 % 46.2 %

Our gross profit, as a percentage of net sales, was 46.1% in 2022 and 46.2% in 2021, a decrease of 10 basis points.

This decrease was primarily related to three factors.

First, in 2022 we experienced relatively higher growth from our large and Onsite customers, which tend to have a lower gross margin percentage than the business as a whole.

This was only partly offset by favorable product mix resulting from relatively higher growth from our fasteners products during the year, which tend to have a higher gross margin percentage than the business as a whole.

Second, in the second half of 2022, we did not pass through pricing sufficient to offset higher costs, which resulted in an adverse impact on our gross margin percentage.

Third, in the second half of 2022, we experienced lower product margins for certain categories of our other products.

We believe slower demand and greater product availability in the marketplace due to supply chain normalization has put some pressure on products that tend to be sold less frequently by our business units.

These factors were mostly offset by a reduction in the amount of pandemic-related write-downs and narrower losses to operate our truck fleet related to our strong freight revenue growth leveraging relatively stable fleet costs.

Operating and Administrative Expenses

Our operating and administrative expenses, as a percentage of net sales, decreased by approximately 80 basis points to 25.2% in 2022 from 26.0% in 2021.

Employee-related expenses, as a percentage of net sales, decreased by approximately 20 basis points.

Occupancy-related expenses, as a percentage of net sales, decreased by approximately 60 basis points.

All other operating and administrative expenses, as a percentage of net sales, was unchanged in 2022 from 2021.

The percentage change in employee-related, occupancy-related, and all other operating and administrative expenses (including the loss (gain) on sales of property and equipment) compared to the same periods in the preceding year, is outlined in the table below.

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

Employee-related expenses 70% to 75% 14.7 % 11.6 %

Occupancy-related expenses 15% to 20% 2.6 % 3.9 %

All other operating and administrative expenses 10% to 15% 18.5 % 4.9 %

Employee-related expenses include:

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

Our employee-related expenses increased in 2022 from 2021.

This was related to:

higher base pay and employment taxes from higher FTE during the period and moderate wage inflation;

an increase in bonuses and commissions resulting from improved sales and profitability;

and an increase in our profit sharing contribution.

This was partly offset by a decline in health insurance costs, as the use of medical services by employees normalized following the post-pandemic catch-up activity in 2021.

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

Twelve-month Period

In-market locations (branches & Onsites) 6.0 % 0.7 %

Non-in-market selling (1)

Selling subtotal 7.9 % 1.7 %

Distribution/Transportation 8.4 % 5.8 %

Manufacturing 12.4 % 2.0 %

Organizational support personnel (2) (3)

Non-selling subtotal 9.3 % 5.8 %

Total 8.3 % 2.8 %

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

Due to a calculation error, organizational support personnel was overstated by 36 FTE in the fourth quarter of 2021, with total non-selling FTE and total FTE being overstated by the same amount.

These figures have been corrected in this Form 10-K.

Adjusting for this error, total FTE in 2021 would have been down by an additional 0.2% for year-to-date growth.

Organizational support personnel consists of:

(1) Sales & Growth Driver Support personnel (35% to 40% of category), which includes sourcing, purchasing, supply chain, product development, etc.;

(2) Information Technology personnel (30% to 35% of category);

and (3) Administrative Support personnel (25% to 30% of category), which includes human resources, Fastenal School of Business, accounting and finance, senior management, etc.

Occupancy-related expenses include:

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

Our occupancy-related expenses increased in 2022 from 2021.

This was related to:

higher costs and depreciation for the maintenance, upgrade and installation of equipment in hub and non-hub facilities;

slightly higher depreciation related to a higher installed base of our FMI suite of technologies;

and slightly higher facility costs, with higher utility costs being only partly offset by lower rents stemming from branch consolidations.

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 2022 from 2021.

This was related to:

higher costs related to selling-related transportation, including higher fuel costs;

higher spending on information technology;

higher spending on travel, meals, and supplies;

and higher general insurance expense.

These elements were only partly offset by lower bad debt expense.

Net Interest Expense

Our net interest expense was $13.6 in 2022 compared to $9.6 in 2021.

We carried higher average debt balances in 2022 relative to the prior year, and specifically higher balances of variable rate credit facility debt, as a result of high sustained working capital needs and an increase in share buybacks.

We also incurred higher average interest rates during the year due to changes in interest levels in the marketplace.

We recorded income tax expense of $353.1 in 2022, or 24.5% of earnings before income taxes, compared to $282.8 in 2021, or 23.4% of earnings before income taxes.

The increase in our tax rate in 2022 is due primarily to reduced benefits associated with the exercise of stock options, an increase in state income tax expense, and an absence of certain favorable reserve adjustments that benefited 2021.

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

Dollar Amounts 2022 2021

Net earnings $ 1,086.9 925.0

Basic EPS 1.89 1.61

Diluted EPS 1.89 1.60

Percentage Change 2022 2021

Net earnings 17.5 % 7.7 %

Basic EPS 17.7 % 7.5 %

Diluted EPS 17.8 % 7.4 %

Tax Rate 24.5 % 23.4 %

During 2022, net earnings increased, primarily due to higher sales and our ability in the period to grow costs more slowly than we grew sales.

This was only slightly offset by a higher income tax rate.

Liquidity and Capital Resources

Net Cash Provided by Operating Activities

Net cash provided by operating activities in dollars and as a percentage of net earnings were as follows:

Net cash provided $ 941.0 770.1

% of net earnings 86.6 % 83.3 %

In 2022, we experienced a slight increase in our operating cash flow as a percentage of net earnings, though this reflects a significant increase in our conversion percentage in the second half of 2022 which more than offset a significant decline in our conversion percentage in the first half of 2022.

Taken as a whole, while our working capital needs remained elevated through 2022, they declined slightly on a year-over-year basis whereas our earnings increased on a year-over-year basis.

Trade Working Capital Assets

The following table sets forth the dollar and percentage change in accounts receivable, net, inventories, and accounts payable for the period ended December 31:

Twelve-month Dollar Change Twelve-month Percentage Change

2022 2022 2022

Accounts receivable, net $ 1,013.2 113.0 12.6 %

Inventories 1,708.0 184.4 12.1 %

Trade working capital $ 2,721.2 297.4 12.3 %

Accounts payable $ 255.0 21.9 9.4 %

Trade working capital, net $ 2,466.2 275.5 12.6 %

Net sales in last two months $ 1,091.9 91.7 9.2 %

Note – Amounts may not foot due to rounding difference.

In 2022, the annual growth in net accounts receivable reflected several factors.

First, our receivables are expanding due to improved business activity and resulting growth in our customers' sales.

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

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

One reason for this is because it is cyclical.

We source significant quantities of product from overseas, and the lead time involved in procuring these products is typically longer than the visibility we have into future monthly sales patterns.

As a result, trends in our inventory will often lag trends in economic conditions.

A second reason relates to product cost and the length of our supply chain.

A significant proportion of our products, particularly fasteners, are sourced from Asia and transported primarily by ship and rail to our North American network for sale.

This requires us to purchase a meaningful quantity of our products months in advance of those products being available for sale in our North American facilities.

Product that is in transit is in our inventory but is not available for sales, which can create a lag in our ability to adjust inventory levels or costs in response to rapid changes in economic or cost conditions.

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

In 2022, our inventories increased, reflecting significant inflation in the value of stocked parts, the addition of inventory to support the growth of our manufacturing and construction customers as they expand production to meet improved business activity, deeper inventory stocking due to disruption in supply chains, and our efforts to sustain higher internal fulfillment rates.

In 2022, the annual growth in accounts payable reflected product purchases increasing to support the improvement in business activity at our manufacturing and construction customers.

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

Selling locations 58 % 57 %

Distribution center and manufacturing locations 42 % 43 %

Total 100 % 100 %

Lease Obligations

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

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

Net Cash Used in Investing Activities

Net cash used in investing activities in dollars and as a percentage of net earnings were as follows:

Net cash used $ 163.0 148.5

% of net earnings 15.0 % 16.1 %

The changes in net cash used in investing activities in 2022 was primarily related to higher net capital expenditures.

Property and equipment expenditures typically consist primarily of:

(1) purchases related to industrial vending, (2) purchases of property and equipment related to expansion of and enhancements to distribution centers, (3) spending on software and hardware for our information processing systems, (4) the addition of fleet vehicles, (5) expansion, improvement or investment in certain owned or leased branch properties, and (6) the addition of manufacturing and warehouse equipment.

Proceeds from the sales of property and equipment, typically for the planned disposition of pick-up trucks as well as distribution vehicles and trailers in the normal course of business, are netted against these purchases an d additions.

Set forth below is a recap of our 2022 and 2021 net capital expenditures in dollars and as a percentage of net sales and net earnings:

Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities $ 97.8 70.3

Shelving and related supplies for in-market location openings and for product expansion at existing in-market locations 21.5 11.0

Data processing software and equipment 30.6 28.0

Real estate and improvements to branch locations 12.4 37.9

Vehicles 11.5 9.4

Purchases of property and equipment 173.8 156.6

Proceeds from sale of property and equipment (11.4) (8.4)

Net capital expenditures 162.4 148.2

% of net sales 2.3 % 2.5 %

% of net earnings 14.9 % 16.0 %

Our net capital expenditures increased in 2022, when compared to 2021.

The most significant area driving this increase was higher spending on FMI equipment.

We had slightly higher property spending, which reflected significant investments in automation and upgrades at our hubs mostly offset by lower spending on a new building in downtown Winona, which was completed in 2021.

We had only modest increases related to our vehicle fleet, manufacturing operations, and information technology.

Net capital expenditures in 2022 were below our anticipated range of $170.0 to $190.0 due to certain equipment and project delays related to hub projects.

We expect our net capital expenditures in 2023 to be within a range of $210.0 to $230.0.

This increase from 2022 reflects:

spending on upgrades to and investments in automation at certain hubs;

the beginning of construction of a distribution center in Utah;

investment in materials to facilitate our branch conversion projects;

higher spending on information technology;

and investments in fleet equipment to support our network of heavy trucks.

Net Cash Used in Financing Activities

Net cash used in financing activities in dollars and as a percentage of net earnings were as follows:

Net cash used $ 774.9 627.1

% of net earnings 71.3 % 67.8 %

The fluctuations in net cash used in financing activities are due to changes in the level of our dividend payments and in the level of common stock purchases.

These amounts were partially offset by the exercise of stock options and net payments (proceeds) from debt obligations.

These items in dollars and as a percentage of earnings were as follows:

Cash dividends paid $ 711.3 643.7

% of net earnings 65.4 % 69.6 %

Purchases of common stock 237.8 —

% of net earnings 21.9 % — %

Total returned to shareholders $ 949.1 643.7

% of net earnings 87.3 % 69.6 %

Proceeds from the exercise of stock options $ (9.2) (31.6)

% of net earnings -0.8 % -3.4 %

Debt obligations (proceeds) payments, net $ (165.0) 15.0

% of net earnings -15.2 % 1.6 %

Net cash used $ 774.9 627.1

% of net earnings 71.3 % 67.8 %

Stock Purchases

In 2022, we purchased 5,000,000 shares of our common stock at an average price of approximately $47.58 per share.

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

We declared a quarterly dividend of $0.35 per share on January 18, 2023.

In 2022, we paid aggregate annual dividends per share of $1.24.

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

In order to fund the considerable cash needed to expand our industrial vending business, expand capacity and increase the use of automation in our distribution centers, pay dividends, and, in 2022, to purchase our common stock, we have borrowed under our Credit Facility and our Master Note Agreement in recent periods.

Our borrowings under the Credit Facility and Master Note Agreement peaked during each quarter of 2022 as follows:

Peak borrowings 2022

First quarter $ 525.0

Second quarter 595.0

Third quarter 650.0

Fourth quarter 710.0

As of December 31, 2022, we had $225.0 outstanding under the Credit Facility and had contingent obligations from letters of credit outstanding under the Credit Facility in an aggregate face amount of $36.3.

As of December 31, 2022, we had loans outstanding under the Master Note Agreement of $330.0.

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

Material Cash Requirements

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

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

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

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

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

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

Unremitted Foreign Earnings

Approximately $184.4 of cash and cash equivalents are held by non-U.S.

subsidiaries.

These funds may create foreign currency translation gains or losses depending on the functional currency of the entity holding the cash.

We have considered the financial requirements of each foreign subsidiary and our parent company and will continue to reinvest these funds to support our expansion activities outside the U.S., even after taking into consideration the deemed repatriation and transition tax under the Tax Cuts and Jobs Act.

The income tax impact of repatriating cash associated with investments in foreign subsidiaries is discussed in Note 7 of the Notes to Consolidated Financial Statements.

Effects of Inflation

In 2022, we began to observe easing in inflationary pressures for metals (especially steel), energy, and transportation services (especially overseas containers and shipping).

However, this did not translate into a reduction in inflationary pressures on our financial results for two reasons.

First, inflationary pressures accelerated through 2021, and many periods in 2022 were comparing to lower cost levels in the preceding year.

Second, we have a long supply chain for many products, and it can take several quarters from when inflationary pressures begin to recede for the effect to impact our earnings results.

In 2022, we increased prices, sought alternative sources for products and service, and consolidated spend for products and services as a means of mitigating inflation.

However, higher product and transportation costs did have a slightly negative effect on our gross margin percentage for the full year.

PRIOR YEAR RESULTS ENDED 2021

Results of Operations

The following sets forth consolidated statements of earnings information (as a percentage of net sales) for the periods ended December 31:

Net sales 100.0 % 100.0 %

Gross profit 46.2 % 45.5 %

Operating and administrative expenses 26.0 % 25.3 %

Operating income 20.3 % 20.2 %

Net interest expense -0.2 % -0.2 %

Earnings before income taxes 20.1 % 20.1 %

Note – Amounts may not foot due to rounding difference.

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.

The table below sets forth net sales and daily sales for the periods ended December 31, and changes in such sales from the prior period to the more recent period:

Net sales $ 6,010.9 5,647.3

Percentage change 6.4 % 5.9 %

3 unchanged sentences

Daily sales impact of currency fluctuations 0.6 % -0.1 %

Daily sales impact of acquisitions 0.0 % 0.0 % 0.1 %

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

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

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

22 unchanged sentences

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

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

First, by virtue of our ability to source and transport PPE, we were able to supply the needs of governments, first responders, and businesses as they worked to mitigate the effects of the pandemic on our communities and normalize business activity under more stringent safety protocols.

This generated significant PPE sales through the year.

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

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

The impact of this is best illustrated by several metrics.

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

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

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

Daily sales of fasteners declined 7.2% in 2020.

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

Taking these two variables together, higher unit sales of PPE more than offset the decline in unit sales in our traditional manufacturing and construction business, resulting in higher net unit sales in 2020.

Our growth drivers did not contribute meaningfully to higher unit sales in 2020, which we believe is largely a function of difficulties gaining access to customers and facilities due to social distancing and safety guidelines in response to COVID-19.

We signed 16,417 industrial vending devices during 2020, a decrease of 24.9% from 2019.

This did increase our installed base to 95,733 devices at the end of 2020, an increase of 6.4% over 2019, but this increase was not sufficient to offset reduced throughput per device.

As a result, sales through our vending devices declined at a low single-digit rate during 2020.

We activated 257 new Onsite locations in 2020, a decrease of 17.6% over 2019.

This allowed us to increase our active sites to 1,265 at the end of 2020, an increase of 13.6% over 2019, but this increase was not sufficient to offset significant sales declines in our older, more established Onsite locations.

As a result, sales through our Onsite locations declined at a low single-digit rate during 2020.

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

Sales by Product Line

The approximate mix of sales from fasteners, safety supplies, and all other product lines was as follows:

2021 2020 2019

Fasteners 33.3% 29.9%

1 unchanged sentence

Other product lines 45.5% 44.6%

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

The shifts in product mix in 2021 compared to 2020 reflect the impact of the pandemic.

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

3 unchanged sentences

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

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

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

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

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

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

Annual Sales Changes, Sequential Trends, and End Market Performance

4 unchanged sentences

Annual Sales Changes, by Month

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

During the months noted below, all of our selling locations, when combined, had a DSR change of (compared to the same month in the preceding year):

May June July Aug.

1 unchanged sentence

2020 3.6 % 4.7 % 0.2 % 6.7 % 14.8 % 9.5 % 2.6 % 2.5 % 2.2 % 4.1 % 6.8 % 9.3 %

2019 13.3 % 10.5 % 12.7 % 7.4 % 9.5 % 7.0 % 6.1 % 6.3 % 5.8 % 4.3 % 5.7 % 1.0 %

Sequential Trends

April, July, and October to December), but generally speaking, climbs from January to October.

The October landing then establishes the benchmark for the start of the next year.

History has identified these landings in our business cycle.

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

The holidays we noted impact the trends because they either move from month-to-month or because they move around during the week.

The table below shows the pattern to the sequential change in our daily sales.

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

The line labeled 'Benchmark' is a historical average of our sequential daily sales change for the trailing five year average that excludes 2020.

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

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

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

The '2021' and '2020' lines represent our actual sequential daily sales changes.

The '21Delta', '20Delta', and '19Delta' lines indicate the difference between the 'Benchmark' and the actual results in the respective year.

The '21Delta' and '20Delta' lines indicate the difference between the 'Benchmark' and the actual results in the respective year.

Under normal circumstances, the sequential trends shown below are directly linked to fluctuations in our end markets.

14 unchanged sentences

20Delta -0.3 % 1.3 % -3.4 % 3.8 % 8.7 % -5.1 % -7.0 % 0.5 % 0.6 % -0.1 % -2.0 %

2019 -0.5 % 1.4 % 4.2 % -2.4 % 2.5 % 1.4 % -4.4 % 3.9 % 3.1 % -4.4 % 4.9 %

19Delta 0.4 % 0.2 % 1.1 % -2.5 % 0.8 % -0.4 % -1.0 % 0.6 % 0.9 % -1.9 % -2.6 %

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

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

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

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

The benchmark for each month is the average of the previous five years for that month.

As COVID-19-related surge sales made sequential averages in 2020 unrepresentative, the benchmark uses a preceding five-year average that excludes 2020.

We also exclude the impact of the 2017 Mansco acquisition.

Note – Amounts may not foot due to rounding difference.

1 unchanged sentence

End Market Performance

We estimate approximately 65% of our business has historically been with customers engaged in some type of manufacturing, a significant subset of which finds its way into the heavy equipment market.

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

Daily sales growth - manufacturing customers Q1 Q2 Q3 Q4 Annual

2021 5.6 % 24.5 % 20.8 % 23.8 % 18.4 %

The DSR change to our manufacturing customers, when compared to the same period in the prior year, was as follows:

DSR change - manufacturing customers Q1 Q2 Q3 Q4 Annual

2021 5.6 % 24.5 % 20.8 % 23.8 % 18.4 %

2020 3.0 % -9.4 % -4.7 % 1.7 % -2.5 %

Our manufacturing business consists of two subsets:

The industrial business is more fastener centered, while the maintenance portion is represented by all product categories.

From a company perspective, daily sales growth (contraction) rates of fasteners, when compared to the same period in the prior year, were as follows (note:

From a company perspective, the DSR change of fasteners, when compared to the same period in the prior year, was as follows (note:

this information includes all end markets):

Daily sales growth - fasteners Q1 Q2 Q3 Q4 Annual

2021 4.0 % 28.4 % 20.2 % 24.2 % 18.8 %

DSR change - fasteners Q1 Q2 Q3 Q4 Annual

2021 4.0 % 28.4 % 20.2 % 24.2 % 18.8 %

2020 -2.6 % -16.4 % -6.9 % -2.3 % -7.2 %

By contrast, the best way to understand the change in the maintenance portion of the manufacturing business is to examine the results in our non-fastener product lines.

From a company perspective, daily sales growth rates of non-fasteners, when compared to the same period in the prior year, were as follows (note:

From a company perspective, the DSR change of non-fasteners, when compared to the same period in the prior year, was as follows (note:

this information includes all end markets):

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

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

DSR change - non-fasteners Q1 Q2 Q3 Q4 Annual

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

8 unchanged sentences

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

This dynamic is visible in 2019 results.

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

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

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

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

The DSR change to our non-residential construction and reseller customers, when compared to the same period in the prior year, was as follows:

DSR change - non-residential construction and reseller customers Q1 Q2 Q3 Q4 Annual

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

2 unchanged sentences

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

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

In 2020, this was exacerbated by project suspensions as many states and regions shut down activity in an effort to control the pandemic.

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

The gross profit percentage during each period was as follows:

2 unchanged sentences

2020 46.6 % 44.5 % 45.3 % 45.6 % 45.5 %

2019 47.7 % 46.9 % 47.2 % 46.9 % 47.2 %

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

4 unchanged sentences

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

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

approximately 25% of total safety product sales in 2019.

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

1 unchanged sentence

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

(3) Our net rebates were favorable.

As supply chains normalized and demand improved, we purchased more

products through our traditional partners increasing our supplier rebates.

(3) Our net rebates were favorable in 2021.

As supply chains normalized and demand improved, we purchased more products through our traditional partners increasing our supplier rebates.

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

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

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

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

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

This decrease was primarily caused by three variables.

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

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

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

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

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

(2) A change in product mix.

Fasteners are our largest and highest gross profit margin product line due to the high transaction cost surrounding the sourcing and supply of the product for customers.

Our fastener product line declined to 29.9% of sales in 2020 from 34.2% of sales in 2019.

(3) Overhead and organizational expenses.

This includes the negative impact that reduced sales for certain product lines has on vendor rebates, clearance efforts to remove older and slower moving inventory, and the deleverage of certain fixed and period costs related to cyclical weakness in our traditional manufacturing and construction markets.

These three adverse variables were partly offset by a better cost profile for our captive fleet.

We operate our own fleet of trucks for moving product between suppliers, our distribution centers, and our in-market locations.

We believe this provides us a competitive advantage in terms of our ability to move product efficiently and quickly, but there is a cost to supporting and maintaining these assets.

During periods of economic weakness, it can become more difficult to charge freight to offset these costs and/or the relatively stable cost profile of these assets could result in deleverage.

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

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

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

Operating and Administrative Expenses

3 unchanged sentences

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

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

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

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

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

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

The growth (contraction) in employee-rela ted, occupancy-related, and al l other operating and administrative expenses (including the gain on sales of property and equipment) compared to the same periods in the preceding year, is outlined in the table below.

The percentage change in employee-rela ted, occupancy-related, and al l other operating and administrative expenses (including the loss (gain) on sales of property and equipment) compared to the same periods in the preceding year, is outlined in the table below.

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

2021 2020 2019

Employee-related expenses 70% 11.6 % -2.0 %

1 unchanged sentence

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

Employee-related expenses include:

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

Our employee-related expenses increased in 2021 from 2020.

1 unchanged sentence

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

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

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

an increase in our profit sharing contribution;

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

Our employee-related expenses decreased in 2020 from 2019.

This was related to:

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

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

and reduced costs associated with the Fastenal School of Business as

training shifted from in-person to online.

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

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

Twelve-month Period

2021 2020 2019

In-market locations (branches & Onsites) 0.7 % -8.0 %

Non-in-market selling (1)

8.0 % 5.4 % 5.3 %

Selling subtotal 1.7 % -6.2 %

1 unchanged sentence

Manufacturing 2.0 % -9.9 %

Administration (2)

9.8 % 8.7 % 8.5 %

Organizational support personnel (2) (3)

Non-selling subtotal 5.8 % -5.2 %

1 unchanged sentence

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

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

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

Occupancy-related expenses include:

Due to a calculation error, organizational support personnel was overstated by 36 FTE in the fourth quarter of 2021, with total non-selling FTE and total FTE being overstated by the same amount.

These figures have been corrected in this Form 10-K.

Adjusting for this error, total FTE in 2021 would have been down by an additional 0.2% for year-to-date growth.

Organizational support personnel consists of:

(1) Sales & Growth Driver Support personnel (35% to 40% of category), which includes sourcing, purchasing, supply chain, product development, etc.;

(2) Information Technology personnel (30% to 35% of category);

and (3) Administrative Support personnel (25% to 30% of category), which includes human resources, Fastenal School of Business, accounting and finance, senior management, etc.

Our occupancy-related expenses increased in 2021 from 2020.

3 unchanged sentences

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

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

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

All other operating and administrative expenses include:

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

4 unchanged sentences

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

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

This was related to:

lower selling-related freight expenses due to reduced travel as a result of COVID-related restrictions, the rationalization of our branch fleet, and significantly reduced travel and meal expenses due to reduced travel as a result of COVID-related restrictions.

This was partly offset by higher spending on information technology.

Net Interest Expense

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

Our net interest expense was $9.6 in 2021 compared to $9.1 in 2020.

This was related to:

1 unchanged sentence

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

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

During 2021, we repaid one tranche under our Master Note Agreement, reducing the balance from $405.0 to $390.0.

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

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

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

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

We recorded income tax expense of $282.8 in 2021, or 23.4% of earnings before income taxes, compared to $273.6 in 2020, or 24.2% of earnings before income taxes.

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

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

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

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

7 unchanged sentences

Diluted EPS 7.4 % 8.4 %

2021 2020 2019

Tax Rate 23.4 % 24.2 %

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

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

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

Results of Operations (Comparison to 2019 Periods)

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

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

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

The table below provides such a comparison:

Twelve-month Period Three-month Period

2021 2019 Change 2021 2019 Change

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

Business days 253 254 62 63

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

1 unchanged sentence

Net cash provided by operating activities in dollars and as a percentage of net earnings were as follows:

2021 2020 2019

Net cash provided $ 770.1 1,101.8

% of net earnings 83.3 % 128.3 %

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

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

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

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

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

Trade Working Capital Assets

Trade working capital assets are highlighted below.

The annual dollar change and the annual percentage change were as follows:

Dollar change 2021 2020

Accounts receivable, net $ 130.8 27.6

Inventories 186.1 (28.9)

Trade working capital $ 316.9 (1.2)

Accounts payable 26.1 14.2

Trade working capital, net 290.8 (15.4)

Annual percentage change 2021 2020

The following table sets forth the dollar and percentage change in accounts receivable, net, inventories, and accounts payable for the period ended December 31:

Twelve-month Dollar Change Twelve-month Percentage Change

2021 2021 2021

Accounts receivable, net $ 900.2 130.8 17.0 %

3 unchanged sentences

Trade working capital, net $ 2,190.7 290.8 15.3 %

Net sales in last two months $ 1,000.1 130.3 15.0 %

Note – Amounts may not foot due to rounding difference.

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

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

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

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

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

3 unchanged sentences

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

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

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

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

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

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

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

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

2021 2020 2019

Selling locations 57 % 59 %

1 unchanged sentence

Total 100 % 100 %

Lease Obligations

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

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

Net Cash Used in Investing Activities

Net cash used in investing activities in dollars and as a percentage of net earnings were as follows:

2021 2020 2019

Net cash used $ 148.5 281.7

% of net earnings 16.1 % 32.8 %

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

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

Property and equipment expenditures typically consist primarily of:

Disposals of property and equipment consisted of the planned disposition of certain pick-up trucks, distribution vehicles, and trailers in the normal course of business.

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

Set forth below is a recap of our 2021 and 2020 net capital expenditures in dollars and as a percentage of net sales and net earnings:

2021 2020 2019

Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities $ 70.3 91.5

13 unchanged sentences

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

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

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

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

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

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

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

Net Cash Used in Financing Activities

Net cash used in financing activities in dollars and as a percentage of net earnings were as follows:

2021 2020 2019

Net cash used $ 627.1 754.4

% of net earnings 67.8 % 87.8 %

The fluctuations in net cash used in financing activities are due to changes in the level of our dividend payments and in the level of common stock purchases.

The fluctuations in net cash used in financing activities were due to changes in the level of our dividend payments and in the level of common stock purchases.

These amounts were partially offset by the exercise of stock options and net payments (proceeds) from debt obligations.

These items in dollars and as a percentage of earnings were as follows:

2021 2020 2019

Dividends paid $ 643.7 803.4 498.6

Cash dividends paid $ 643.7 803.4

% of net earnings 69.6 % 93.5 %

Common stock purchases — 52.0 —

Purchases of common stock — 52.0

% of net earnings — % 6.1 %

3 unchanged sentences

% of net earnings -3.4 % -4.8 %

Cash payments (proceeds), net $ 15.0 (60.0) 155.0

Debt obligations payments (proceeds), net $ 15.0 (60.0)

% of net earnings 1.6 % -7.0 %

4 unchanged sentences

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

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

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

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

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

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

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

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

Peak borrowings 2021

3 unchanged sentences

Fourth quarter 470.0

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

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

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

Material Cash Requirements

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

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

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

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

Unremitted Foreign Earnings

Approximately $178.5 of cash and cash equivalents are held by non-U.S.

subsidiaries.

These funds may create foreign currency translation gains or losses depending on the functional currency of the entity holding the cash.

The income tax impact of repatriating cash associated with investments in foreign subsidiaries is discussed in Note 7 of the Notes to Consolidated Financial Statements.

Effects of Inflation

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

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

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

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

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

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

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

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

These were event-specific circumstances related to the pandemic.

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

Critical Accounting Policies and Estimates

Critical Accounting Estimates

In preparing our consolidated financial statements in conformity with U.S.

14 unchanged sentences

Our methodology for estimating whether adjustments are necessary is continually evaluated for factors including significant changes in product demand, market conditions, condition of the inventory, or liquidation value.

If business or economic conditions change, our

estimates and assumptions may be adjusted as deemed appropriate.

If business or economic conditions change, our estimates and assumptions may be adjusted as deemed appropriate.

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

4 unchanged sentences

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

New Accounting Pronouncements

A description of new accounting pronouncements is contained in Note 1 of the Notes to Consolidated Financial Statements.

Geographic Information

Information regarding our revenues and long-lived assets by geographic area is contained in Note 2 and Note 3 of the Notes to Consolidated Financial Statements.

Risks related to our foreign operations are described earlier in this Form 10-K under the heading 'Forward-Looking Statements' and 'Item 1A.

Risk Factors'.

Recently Issued and Adopted Accounting Pronouncements

A description of recently issued and adopted accounting pronouncements, if any, is contained in Note 1 of the Notes to Consolidated Financial Statements.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis