FASTENAL CO 10-Q

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks from changes in foreign currency exchange rates, commodity steel pricing, commodity energy prices, and interest rates. Changes in these factors cause fluctuations in our earnings and cash flows. We evaluate and manage exposure to these market risks as follows: Foreign currency exchange rates – Foreign currency fluctuations can affect our net investments, our operations in countries other than the U.S., and earnings denominated in foreign currencies. Historically, our primary exchange rate exposure has been with the Canadian dollar against the United States dollar. Our estimated net earnings exposure for foreign currency exchange rates was not material in the first quarter of 2023. We have not historically hedged our foreign currency risk given that exposure to date has not been material. In the first quarter of 2023, changes in foreign currency exchange rates decreased our reported net sales by $12.5 with the estimated effect on our net earnings being immaterial. Commodity steel pricing – We buy and sell various types of steel products; these products consist primarily of different types of threaded fasteners and related hardware. We are exposed to the impacts of commodity steel pricing and our related ability to pass th rough the impacts to our end customers. During the first quarter of 2023, the price of steel as reflected in many market indexes was below the prior year, although in many cases they were above the levels experienced in the fourth quarter of 2022. Due to our long supply chain, changes that we experienced in the first quarter of 2023 do not immediately impact our earnings results. In fact, we were not able to fully compensate for higher costs through higher prices in the first quarter of 2023, resulting in a modestly negative impact to our gross margin percentage in the period. We estimate the effect on our net earnings was immaterial in the first quarter of 2023. Commodity energy prices – We have market risk for changes in prices of oil, gasoline, diesel fuel, natural gas, and electricity. As reflected in many market indexes, energy prices during the first quarter of 2023 were generally at or below prior year levels, which contributed to relatively stable costs for fuel consumed in our vehicles and lower utility costs at our facilities. Total direct fuel consumption is a relatively minor cost to the company and, as a result, estimated net earnings exposure related to changes in commodity energy prices was immaterial in the first quarter of 2023. Fossil fuels are also often a key feedstock for chemicals and plastics that comprise a key raw material for many products that we sell. During the first quarter of 2023, prices for fossil fuels were generally at or below prior year levels. Due to long supply chains, changes that we experienced in the first quarter of 2023 do not immediately impact our earnings results. As a result, in the first quarter of 2023 our estimated net earnings exposure for materials for which fossil fuels are feedstock was immaterial. Interest rates - Loans under our Credit Facility bear interest at floating rates. As a result, changes in such rates can affect our operating results and liquidity to the extent we do not have effective interest rate swap arrangements in place. We have not historically used interest rate swap arrangements to hedge the variable interest rates under our Credit Facility. A one percentage point increase to our floating rate debt in the first quarter of 2023 would have resulted in approximately $0.3 of additional interest expense. A description of our Credit Facility is contained in Note 6 of the Notes to Condensed Consolidated Financial Statements.