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Item 2. Management’s Discussion and Analysis

2023-04-18 compared with 2022-10-18 · 112 added, 251 removed, 163 unchanged (69% of the section changed)

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

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

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

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

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

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

Our motto is Where Industry Meets Innovation ™ .

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.

Our motto is Growth Through Customer Service ® and our tagline is Where Industry Meets Innovation ™ .

We are a customer- and growth-centric organization focused on identifying unique technologies, capabilities, and supply chain solutions that get us closer to our customers and reduce the total cost of their global supply chain.

We believe this close-to-the-customer, high touch partnership approach is differentiated in the marketplace and allows us to gain market share in what remains a fragmented industrial distribution market.

We believe this close-to-the-customer, 'high-touch, high-tech' partnership approach is differentiated in the marketplace and allows us to gain market share in what remains a fragmented industrial distribution market.

Executive Overview

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

Nine-month Period Three-month Period

2022 2021 Change 2022 2021 Change

The following table presents a performance summary of our results of operations for the three-month periods ended March 31, 2023 and 2022 .

Three-month Period

2023 2022 Change

Net sales $ 1,859.1 1,704.1 9.1 %

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Diluted net earnings per share $ 0.52 0.47 10.4 %

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

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

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

In-market locations - absolute employee headcount

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Weighted FMI devices (MEU installed count) 104,673 102,151 2.5 % 94,425 10.9 %

99,409 96,872 2.6 % 92,874 7.0 % 90,493 9.9 %

(1) This number excludes approximately 7,500 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 1,304.

This reflects an increase in our in-market and non-in-market selling FTE employee headcount of 863 to support growth in the marketplace and sales initiatives targeting customer acquisition.

We had an increase in our distribution center FTE employee headcount of 329 to support increasing product throughput at our facilities and to expand our local inventory fulfillment terminals (LIFTs).

We had an increase in our distribution center FTE employee headcount of 173 to support increased 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 268 that relates primarily to personnel investments in information technology, manufacturing, and operational support, such as purchasing and product development.

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

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

In any period, the number of closings tends to reflect both normal churn in our business, whether due to redefinin g or exiting customer relationships, the shutting or relocation of customer facilities that host our locations, or a customer decision, as well as our ongoing review of underperforming locations.

Our in-market n etwork forms the foundation of our business strategy, and we will continue to open or close locations as is deemed necessary to sustain and improve our network, support our growth drivers, and manage our operating expenses.

THIRD QUARTER OF 2022 VERSUS THIRD QUARTER OF 2021

The table below summarizes the number of branches opened and closed, net of conversions, as well as the number of Onsites activated and closed, net of conversions during the periods presented.

Three-month Period

Branch openings 2 6

Branch closures, net of conversions (25) (39)

Onsite activations 84 57

Onsite closures, net of conversions (33) (33)

In any period, the number of closings tends to reflect normal churn in our business, whether due to redefining 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 network 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.

FIRST QUARTER OF 2023 VERSUS FIRST QUARTER OF 2022

Results of Operations

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

The following table sets forth condensed consolidated statement of earnings information (as a percentage of net sales) for the periods ended March 31:

Three-month Period

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Note – Amounts may not foot due to rounding difference.

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

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 March 31, and changes in such sales from the prior period to the more recent period:

Three-month Period

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Daily sales impact of currency fluctuations -0.7 % -0.1 %

Note – Daily sales are defined as the total net sales for the period divided by the number of business days (in the United States) in the period.

Net sales increased $248.2, or 16.0%, in the third quarter of 2022 when compared to the third quarter of 2021.

Net sales increased $155.0, or 9.1%, in the first quarter of 2023 when compared to the first quarter of 2022.

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

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

reduced our quarterly growth by 10 to 30 basis points.

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

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

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

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

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

We did not take any broad pricing actions in the third quarter of 2022, and price levels in the market remained stable.

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

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

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

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

We experienced higher unit sales in the first quarter of 2023 that contributed to the increase in net sales in the period.

This was due to further growth in underlying demand in markets tied to industrial capital goods and commodities, which more than offset a modest contraction for construction supplies.

Foreign exchange negatively affected sales in the first quarter of 2023 by approximately 70 basis points, while adverse weather impacts in February 2023 negatively affected sales in the first quarter of 2023 by 20 to 40 basis points.

The impact of product pricing on net sales in the first quarter of 2023 was 290 to 320 basis points compared to the first quarter of 2022.

The increase reflects carryover from broad pricing actions taken in the prior year designed to mitigate marketplace inflation for our products and services and, to a lesser degree , targeted actions in the first quarter of 2023 intended to address gross margin pressure for our non-fastener and non-safety products.

Spot prices in the marketplace for many inputs remained below prior year levels, though in many cases they were at or above levels experienced in the fourth quarter of 2022.

The combination of good demand, more stable cost trends, and our long supply chain for imported fasteners and certain non-fastener products produced stable price levels for our products.

The impact of product pricing on net sales in the first quarter of 2022 was 580 to 610 basis points.

From a product standpoint, we have three categories:

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national accounts, which are customers with a multi-site contract, and non-national accounts, which include large regional customers, small local customers, and government customers.

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

Sales to most of our national account customers grew in the first quarter of 2023 over the prior year, as our sales grew at 82 of our Top 100 national account customers.

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

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Growth Drivers

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

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

Daily sales through our Onsite locations, excluding sales transferred from branches to new Onsites, grew at a greater than 20% rate in the third quarter of 2022 over the third quarter of 2021.

This growth is due to improved business activity from our Onsite customers and, to a lesser degree, contributions from the increase in the number of Onsites we operate.

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

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

• We signed 89 new Onsite locations (defined as dedicated sales and service provided from within, or in proximity to, the customer's facility) in the first quarter of 2023.

We had 1,674 active sites on March 31, 2023, which represented an increase of 16.3% from March 31, 2022.

Daily sales through our Onsite locations, excluding sales transferred from branches to new Onsites, grew roughly 20% in the first quarter of 2023 over the first quarter of 2022.

This growth is due to contributions from Onsites activated and implemented over the last twelve months, as well as continued growth from our older Onsite locations.

Our goal for Onsite signings in 2023 remains between 375 to 400.

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

FASTStock's fulfillment processing technology is not embedded, is relatively less expensive and highly flexible in application, and delivered using our proprietary mobility technology.

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Beginning in the first quarter of 2021, we began disclosing certain statistics around our FMI offering.

The first statistic is a weighted FMI ® measure which combines the signings and installations of FASTBin and FASTVend in a standardized machine equivalent unit (MEU) based on the expecte d output of each type of device.

We do not include FASTStock in this measurement because scanned stocking locations can take many forms, such as bins, shelves, cabinets, pallets, etc., that cannot be converted into a standardized MEU.

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% of sales 39.4 % 35.4 %

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

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

Our goal for weighted FASTBin and FASTVend device signings in 2023 remains between 23,000 to 25,000 MEUs.

• Our eCommerce business includes sales made through an electronic data interface (EDI), or other types of technical integrations, and through our web verticals.

Daily sales through eCommerce grew 50.2% in the third quarter of 2022 and represented 18.0% of our total revenues in the period.

Daily sales through eCommerce grew 48.7% in the first quarter of 2023 and represented 21.9% of our total sales in the period.

Our d igital products and services are comprised of sales through FMI (FASTStock, FASTBin, and FASTVend) plus that proportion of our eCommerce sales that do not represent billings of FMI services (collectively, our Digital Footprint).

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As a result, we believe our opportunity to grow our business will be enhanced through the continued development and expansion of our digital capabilities.

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

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

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

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

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

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

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

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

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

Our Digital Footprint in the first quarter of 2023 represented 54.1% of our sales, an increase from 47.0% of sales in the first quarter of 2022.

Our gross prof it, as a percentage of net sales, declined to 45.7% in the first q uarter of 2023 from 46.6% in the first quarter of 2022.

The change in our gross profit percentage primarily reflected four items.

First, customer and product mix reduced our gross margin percentage.

We experienced relatively strong growth from Onsite customers and non-fastener products, each of which tend to have a lower gross margin percentage than our business as a whole.

This impact widened sli ghtly on a sequential basis.

Second, lower product margins in certain of our other product categories reduced our gross margin percentage.

The combination of elevated costs and normalization of product availability for less frequently sold, often non-standard products where there is less visibility into the supply chain has produced some gross margin pressure.

We took actions in the first quarter of 2023 to begin to address these pressures.

Third, we had higher organizational/overhead costs, primarily due to higher inbound freight costs and working capital needs being relieved from inventory and generating higher period costs.

Fourth, freight expenses were favorable, partially offsetting the negative impacts of mix, product gross margin pressure, and organizational/overhead costs.

This favorable impact was from costs related to importing product from overseas suppliers being below prior year levels, the volume of containers being imported from overseas suppliers being lower, and record domestic freight revenue leveraging what are relatively stable costs to support our captive fleet.

Operating Income

Our operating income, as a percentage of net sales, increased to 21.2% in the first quarter of 2023 from 21.0% in the first quarter of 2022.

This was due to improved operating expense leverage, which more than offset the decline in our gross profit percentage.

Operating and Administrative Expenses

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

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

Our operating and administrative expenses, as a percentage of net sales, fell to 24.6% in the first quarter of 2023 from 25.5% in the first quarter of 2022.

This reflected declines, as a percentage of net sales, in employee-related and occupancy-related expenses.

Th e percentage change in employee- related, occupancy-related, and all other operating and administrative expenses compared to the same periods in the preceding year, is outlined in the table below.

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

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

We experienced an increase in employee base pay, albeit at a rate below the growth in sales, due to higher average FTE during the period and, to a lesser degree, higher average wages.

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

We also had higher profit sharing expense.

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

In the first quarter of 2023, our employee-relate d expenses increased when com pared to the first quarter of 2022.

We experienced an increase in employee base pay due to higher average FTE during the period and, to a lesser degree, higher average wages.

Bonus and commission payments decreased reflecting the impact of slower sales and profit growth versus the prior year.

We also experienced higher profit sharing costs.

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

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(1) Organizational support personnel consists of:

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

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

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

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

(2) Information Technology personnel (35% to 40% 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).

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

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

Total building costs were mostly flat in the period.

In the first quarter of 2023, our occupancy-related expenses increased when compared to the first quarter of 2022.

This increase largely reflects higher costs for FMI hardware as we continue to expand our installed base of such hardware.

This was partly offset by slightly lower facility expenses as a result of further branch consolidation and lower utility costs.

All other operating and administrative expenses include:

(1) selling-related transportation, (2) information technology (IT) expenses, (3) general corporate expenses, which consists of legal expenses, general insurance expenses, travel and marketing expenses, etc., and (4) the loss (gain) on sales of property and equipment.

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

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

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

Combined, all other operating and administrative expenses increased in the first quarter of 2023 when compared to the first quarter of 2022.

The increase in other operating and administrative expenses relates primarily to higher spending on information technology, increased general insurance costs, and higher spending on travel expenses and supplies.

This was only partly offset by lower product movement and fuel costs for our local truck fleet, reduced bad debt expense, and higher profits on sales of assets.

Net Interest Expense

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

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

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

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

Our net interest expense was $3.5 in the first quarter of 2023, compared to $2.3 in the first quarter of 2022.

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

We recorded income tax expense of $94.6 in the first quarter of 2023, or 24.3% of earnings before income taxes.

Income tax expense was $86.1 in the first quarter of 2022, or 24.2% of earnings before income taxes.

We believe our ongoing tax rate, absent any discrete tax items or broader changes to tax law, will be approximately 24.5%.

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

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

Our net earnings during the first quarter of 2023 were $295.1, an increase of 9.5% compared to the first quarter of 2022.

Our diluted net earnings per share were $0.52 during the first quarter of 2023, which increased from $0.47 during the first quarter of 2022.

Liquidity and Capital Resources

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

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

Three-month Period

2023 2022 Change

Net cash provided by operating activities $ 388.5 230.0 68.9 %

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Net Cash Provided by Operating Activities

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

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

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

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

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

The improvement in operating cash flow as a percent of net earnings is due to working capital being a source of cash in the first quarter of 2023, versus working capital being a significant use of cash in the first quarter of 2022.

Global supply chains have normalized versus the prior year, resulting in a reduction in the amount of working capital necessary to keep on hand to support our customers' growth.

The dollar and percentage change in accounts receivable, net, inventories, and accounts payable as of March 31, 2023 when compared to March 31, 2022 were as follows:

March 31 Twelve-month Dollar Change Twelve-month Percentage Change

2023 2022 2023 2023

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Trade working capital, net $ 2,534.9 2,382.5 $ 152.5 6.4 %

Net sales in last two months $ 1,249.1 1,062.5 $ 186.6 17.6 %

Net sales in last three months $ 1,859.1 1,704.1 $ 155.0 9.1 %

Note - Amounts may not foot due to rounding difference.

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

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

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

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

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

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

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

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

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

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

The increase in our accounts receivable balance in the first quarter of 2023 is primarily attributable to two factors.

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

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

The increase in our inventory balance in the first quarter of 2023 is primarily attributable to supporting the improved business activity of our customers.

We were able to provide this support even while growing inventory at a slower rate than sales.

reflects the absence of supply disruptions from the prior year that we managed by deepening our inventory, especially imported inventory, and which has allowed us to begin gradually shortening our product ordering cycle.

The decrease in our accounts payable balance in the first quarter of 2023 is primarily attributable to the dissipation of supply disruptions from the prior year.

That allowed us to gradually begin to shorten our product ordering cycle and reduce the volume of product purchases in the first quarter of 2023 versus the first quarter of 2022.

Net Cash Used in Investing Activities

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

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

Net cash used in investing activities decreased by $2.2 in the first quarter o f 2023 when compared to the first quarter of 2022.

T his was due to slightly lower purchases of property and equipment, net of proceeds from the sale of property and equipment, in the first quarter of 2023 compared to the first quarter of 2022.

Our capital spending will typical ly fall into six categories:

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

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

We had higher spending for FMI equipment, information technology, and hub safety and automation upgrades, which was more than offset by lower spending on a new building in downtown Winona, completed in 2021.

During the first quarter of 2023, our net capital expenditures (purchases of property and equipment net of proceeds from sales of property and equipment) were $30.9, which is a decrease from $33.1 in the first quarter of 2022.

Cash requirements for capital expenditures were satisfied from cash generated from operations, available cash and cash equivalents, our borrowing capacity, and the proceeds of disposals.

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

This annual increase reflects primarily:

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

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

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

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

During the full year of 2023, we continue to expect our investment in property and equipment, net of proceeds of sales, to be within a ran ge of $210.0 to $230.0, increas ing from $162.4 in 2022.

This increase reflects primarily:

(1) higher property-related spending on upgrades to and investments in automation of certain facilities, the beginning of construction of a distribution center in Utah, and investment in materials to facilitate our branch conversion projects;

(2) investments in fleet equipment to support our network of heavy trucks;

and (3) an increase in spending on information technology.

In addition to capital expenditures, material cash requirements for known contractual obligations include debt and lease obligations which are discussed in more detail earlier in this report in the Notes to Condensed Consolidated Financial Statements and in our 2022 annual report on Form 10-K.

Net Cash Used in Financing Activities

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

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

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

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

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

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

These authorizations do not have an expiration date.

Net cash used in financing acti vities increased $149.4 in the first quarter of 2023 when compared to the first quarter of 2022.

This is primarily related to a reduction in our debt obligations, which reflected strong operating cash generation in the period and, to a lesser degree, an increase in cash used for dividend payments.

During the first quarter of 2023, we returned $199.8 in dividends to our shareholders, compared to the first quarter of 2022 when we returned $178.4 in dividends.

We did not repurchase our common stock in either period.

We have authority to purchase up to 6,200,000 additional shares of our common stock under the July 12, 2022 authorization.

This authorization does not have an expiration date.

Total debt on our balance sheet was $400.0 at the end of the first quarter of 2023, or 10.9% of total capital (the sum of stockholders' equity and total debt).

This compares to $365.0, or 10.4% of total capital, at the end of the first quarter of 2022.

This increase is from the repurchase of $237.8 of our common stock over the past twelve months.

An overview of our cash dividends paid or declared in 2023 and 2022 is contained in Note 3 of the Notes to Condensed Consolidated Financial Statements.

NINE MONTHS ENDED SEPTEMBER 30, 2022 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2021

Results of Operations

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

Nine-month Period

Net sales 100.0 % 100.0 %

Gross profit 46.3 % 46.1 %

Operating and administrative expenses 25.1 % 25.6 %

Operating income 21.2 % 20.5 %

Net interest expense -0.2 % -0.2 %

Earnings before income taxes 21.0 % 20.3 %

Note – Amounts may not foot due to rounding difference.

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

Nine-month Period

Net sales $ 5,285.0 4,479.0

Percentage change 18.0 % 4.4 %

Business days 192 191

Daily sales $ 27.5 23.5

Percentage change 17.4 % 5.0 %

Daily sales impact of currency fluctuations -0.4 % 0.8 %

Note – Daily sales are defined as the total net sales for the period divided by the number of business days (in the United States) in the period.

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

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

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

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

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

The overall impact of product pricing on net sales was 600 to 630 basis points during the first nine months of 2022.

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

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

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

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

The impact of product pricing on net sales was 120 to 150 basis points during the first nine months of 2021 .

From a product standpoint, we have three categories:

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

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

Nine-month Period

2022 2021 2022 2021

Fasteners 21.2 % 17.1 % 34.3 % 33.2 %

Safety supplies 13.8 % -15.0 % 20.6 % 21.2 %

Other 15.7 % 8.1 % 45.1 % 45.6 %

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

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

Nine-month Period

2022 2021 2022 2021

Manufacturing 23.2% 16.7% 72.0% 68.6%

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

Other 2.1% -21.1% 17.6% 20.2%

We report our customers in two categories:

national accounts, which are customers with a multi-site contract, and non-national accounts, which include large regional customers, small local customers, and government customers.

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

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

Nine-month Period

2022 2021 2022 2021

National Accounts 22.1 % 8.2 % 57.5 % 56.2 %

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

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

Nine-month Period

2022 2021 Change

Weighted FASTBin/FASTVend signings (MEUs) 16,005 15,339 4.3 %

Signings per day 83 80

Weighted FASTBin/FASTVend installations (MEUs;

end of period) 99,409 90,493 9.9 %

FASTStock sales $ 621.7 416.9 49.1 %

% of sales 11.6 % 9.2 %

FASTBin/FASTVend sales $ 1,302.2 981.1 32.7 %

% of sales 24.4 % 21.7 %

FMI sales $ 1,923.9 1,398.0 37.6 %

FMI daily sales $ 10.0 7.3 36.9 %

% of sales 36.0 % 30.9 %

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

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

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

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

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

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

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

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

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

Operating and Administrative Expenses

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

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

Th e percentage change in employee- related, occupancy-related, and all other operating and administrative expenses compared to the same periods in the preceding year, is outlined in the table below.

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

Employee-related expenses 70% to 75% 17.8 %

Occupancy-related expenses 15% to 20% 3.5 %

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

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

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

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

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

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

Non-in-market selling 2,387 2,076 15.0 %

Selling subtotal 14,284 13,413 6.5 %

Distribution/Transportation 2,889 2,740 5.4 %

Manufacturing 671 619 8.4 %

Organizational support personnel (1)

1,675 1,598 4.8 %

Non-selling subtotal 5,235 4,957 5.6 %

Total 19,519 18,370 6.3 %

(1) Organizational support personnel consists of:

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

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

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

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

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

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

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

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

Net Interest Expense

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

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

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

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

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

Liquidity and Capital Resources

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

Nine-month Period

Net cash provided by operating activities $ 639.1 613.7

Percentage of net earnings 76.0 % 88.5 %

Net cash used in investing activities $ 121.6 107.0

Percentage of net earnings 14.5 % 15.4 %

Net cash used in financing activities $ 506.2 498.2

Percentage of net earnings 60.2 % 71.8 %

Net Cash Provided by Operating Activities

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

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

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

Net Cash Used in Investing Activities

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

This was primarily due to an increase in our net capital expenditures (purchases of property and equipment net of proceeds from sales of property and equipment) in the first nine months of 2022 compared to in the first nine months of 2021.

During the first nine months of 2022, our net capital expenditures were $120.9, which is an increase of 13.0% from the first nine months of 2021.

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

Net Cash Used in Financing Activities

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

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

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

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

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

Critical Accounting Policies and Estimates – A discussion of our critical accounting policies and estimates is contained in our 2022 annual report on Form 10-K.

5 unchanged sentences

Any statement that is not a purely historical fact, including estimates, projections, trends, and the outcome of events that have not yet occurred, is a forward-looking statement.

Our forward-looking statements generally relate to our expectations and beliefs regarding the business environment in which we operate, our projections of future performance, our perceived marketplace opportunities, our strategies, goals, mission and vision, and our expectations related to future capital expenditures, future tax rates, future inventory levels, pricing, Onsite and weighted FMI device signings, the impact of inflation on our cost of goods or operating costs, and the impact of price increases and surge sales on overall sales growth or margin performance.

You should understand that forward-looking statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions.

Consequently, no forward-looking statement can be guaranteed and actual results may vary materially.

Factors that could cause our actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the impact of the COVID-19 pandemic, economic downturns, weakness in the manufacturing or commercial construction industries, competitive pressure on selling prices, changes in our current mix of products, customers, or geographic locations, changes in our average branch size, changes in our purchasing patterns, changes in customer needs, changes in fuel or commodity prices, inclement weather, changes in foreign currency exchange rates, difficulty in adapting our business model to different foreign business environments, failure to accurately predict the market potential of our business strategies, the introduction or expansion of new business strategies, weak acceptance or adoption of our FMI offering or Onsite business models, increased competition in FMI or Onsite, difficulty in maintaining installation quality as our FMI business expands, the leasing to customers of a significant number of additional FMI devices, the failure to meet our goals and expectations regarding branch openings, branch closings, or expansion of our FMI offering or Onsite operations, changes in the implementation objectives of our business strategies, our ability to retain certain government and other types of customers that bought product from us for the first time during the pandemic, difficulty in hiring, relocating, training, or retaining qualified personnel, difficulty in controlling operating expenses, difficulty in collecting receivables or accurately predicting future inventory needs, dramatic changes in sales trends, changes in supplier production lead times, changes in our cash position or our need to make capital expenditures, credit market volatility, changes in tax law or the impact of any such changes on future tax rates, changes in tariffs or the impact of any such changes on our financial results, changes in the availability or price of commercial real estate, changes in the nature, price, or availability of distribution, supply chain, or other technology (including software licensed from third parties) and services related to that technology, cyber-security incidents, potential liability and reputational damage that can arise if our products are defective, difficulties measuring the contribution of price increases on sales growth, acts of war, and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission, including our most recent annual and quarterly reports.

Factors that could cause our actual results to differ from those discussed in the forward-looking statements include, but are not limited to, economic downturns, weakness in the manufacturing or commercial construction industries, competitive pressure on selling prices, changes in our current mix of products, customers, or geographic locations, changes in our average branch size, changes in our purchasing patterns, changes in customer needs, changes in fuel or commodity prices, inclement weather, changes in foreign currency exchange rates, difficulty in adapting our business model to different foreign business environments and the challenges of operating in foreign business environments, failure to accurately predict the market potential of our business strategies, the introduction or expansion of new business strategies, weak acceptance or adoption of our FMI offering or Onsite business models, increased competition in FMI or Onsite, difficulty in maintaining installation quality as our FMI business expands, the leasing to customers of a significant number of additional FMI devices, the failure to meet our goals and expectations regarding branch openings, branch closings, or expansion of our FMI offering or Onsite operations, changes in the implementation objectives of our business strategies, challenges in developing and expanding our digital capabilities, difficulty in hiring, relocating, training, or retaining qualified personnel, difficulty in controlling operating expenses, difficulty in collecting receivables or accurately predicting future inventory needs, dramatic changes in sales trends, changes in supplier production lead times, changes in our cash position or our need to make capital expenditures, credit market volatility, changes in tax law or the impact of any such changes on future tax rates, changes in tariffs or the impact of any such changes on our financial results, changes in the availability or price of commercial real estate, changes in the nature, price, or availability of distribution, supply chain, or other technology (including software licensed from third parties) and services related to that technology, cyber-security incidents, potential liability and reputational damage that can arise if our products are defective, difficulties measuring the contribution of price increases on sales growth, acts of war, and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission, including our most recent annual and quarterly reports.

Each forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any such statement to reflect events or circumstances arising after such date.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis