What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-18 compared with 2023-04-18 · 232 added, 83 removed, 192 unchanged (62% 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 over 3,300 in-market locations.

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

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

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Executive Overview

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

The following table presents a performance summary of our results of operations for the six-month and three-month periods ended June 30, 2023 and 2022 .

Six-month Period Three-month Period

2023 2022 Change 2023 2022 Change

Net sales $ 3,742.2 3,482.6 7.5 % $ 1,883.1 1,778.6 5.9 %

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Diluted net earnings per share $ 1.04 0.96 7.4 % $ 0.52 0.50 4.6 %

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 summarizes our absolute and full time equivalent (FTE;

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In-market locations - absolute employee headcount 13,668 13,668 0.0 % 13,410 1.9 % 13,134 4.1 %

13,668 13,410 1.9 % 12,855 6.3 %

In-market locations - FTE employee headcount 12,380 12,219 1.3 % 12,017 3.0 % 12,039 2.8 %

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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

Six-month Period Three-month Period

2023 2022 2023 2022

Branch openings 5 8 3 2

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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

SECOND QUARTER OF 2023 VERSUS SECOND 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 March 31:

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

Three-month Period

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

The table below sets forth net sales and daily sales for the periods ended June 30, 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 -0.4 % -0.5 %

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

Net sales increased $104.6, or 5.9%, in the second quarter of 2023 when compared to the second quarter of 2022.

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

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.

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

This was primarily due to growth at our Onsite locations, particularly those opened in the last two years, which more than offset lower revenues in construction and reseller end markets related to the execution of our go-to-market branch strategy.

Foreign exchange negatively affected sales in the second quarter of 2023 by approximately 40 basis points.

The impact of product pricing on net sales in the second quarter of 2023 was 190 to 220 basis points compared to the second quarter of 2022.

This largely reflects the impact of general inflationary conditions in the marketplace over the past twelve months and the carryover of targeted actions taken in the first quarter of 2023 to address gross margin pressure for non-fastener and non-safety products.

The impact of product pricing on net sales in the second quarter of 2022 was 660 to 690 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 first quarter of 2023 over the prior year, as our sales grew at 82 of our Top 100 national account customers.

Sales to most of our national account customers grew in the second quarter of 2023 over the prior year, as our sales grew at 73 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 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.

• We signed 86 new Onsite locations (defined as dedicated sales and service provided from within, or in proximity to, the customer's facility) in the second quarter of 2023, resulting in 175 year-to-date signings of new Onsite locations.

We had 1,728 active sites on June 30, 2023, which represented an increase of 15.1% from June 30, 2022.

Daily sales through our Onsite locations, excluding sales transferred from branches to new Onsites, grew at a high-teens rate in the second quarter of 2023 over the second quarter of 2022.

This growth is due to contributions from Onsites activated and implemented in 2022 and 2023, as well as continued growth from our older Onsite locations.

Based on the signings in the first six months of 2023, we currently expect to sign approximately 350 new Onsite locations for the full year of 2023, which is adjusted from our original goal of 375 to 400.

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

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• 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 48.7% in the first quarter of 2023 and represented 21.9% of our total sales in the period.

Daily sales through eCommerce grew 44.7% in the second quarter of 2023 and represented 23.3% 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 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.

Our Digital Footprint in the second quarter of 2023 represented 55.3% of our sales, an increase from 47.9% of sales in the second quarter of 2022.

Our gross prof it, as a percentage of net sales, declined to 45.5% in the second q uarter of 2023 from 46.5% in the second quarter of 2022.

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

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

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

This impact widened on a sequential basis.

Second, 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.

Third, freight expenses were favorable, partially offsetting the negative impacts of mix and organizational/overhead costs.

This favorable impact reflects record domestic freight revenue leveraging what are relatively stable costs to support our captive fleet, lower expenses related to external freight providers, and lower fuel costs.

The impact of price/cost was immaterial to our gross profit percentage in the second quarter of 2023.

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.

Our operating income, as a percentage of net sales, decreased to 21.0% in the second quarter of 2023 from 21.6% in the second quarter of 2022.

The operating leverage we achieved in the second quarter of 2023 was not sufficient to offset the decline in our gross profit percentage.

Operating and Administrative 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.

Our operating and administrative expenses, as a percentage of net sales, improved to 24.6% in the second quarter of 2023 from 25.0% in the second quarter of 2022.

This reflected a decline, as a percentage of net sales, in employee-related expenses partly offset by an increase, 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.

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

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

We also experienced higher healthcare-related 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) 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 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.

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

This increase largely reflects higher costs for FMI hardware as we continue to expand our installed base of such hardware, higher facility costs, including utilities, and higher maintenance expenses.

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) sales of property and equipment.

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.

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

The increase in other operating and administrative expenses relates primarily to higher spending on information technology and expenses for travel and supplies.

This was partly offset by lower fuel costs related to our local truck fleet.

Net Interest Expense

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.

Our net interest expense was $2.3 in the second quarter of 2023, compared to $2.7 in the second quarter of 2022.

Lower average borrowings over the period were only partially offset by higher average interest rates paid on those borrowings.

We recorded income tax expense of $94.6 in the second quarter of 2023, or 24.1% of earnings before income taxes.

Income tax expense was $93.6 in the second quarter of 2022, or 24.6% 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 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.

Our net earnings during the second quarter of 2023 were $298.0, an increase of 3.8% compared to the second quarter of 2022.

Our diluted net earnings per share were $0.52 during the second quarter of 2023, which increased from $0.50 during the second quarter of 2022.

Liquidity and Capital Resources

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

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

Three-month Period

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Net cash used in financing activities $ 243.3 85.9 183.2 %

Percentage of net earnings 118.2 % 74.0 %

Net Cash Provided by Operating Activities

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

Net cash provided by operating activities increased $150.9 in the second quarter of 2023 when compared to the second quarter of 2022.

The improvement in operating cash flow, as a percent of net earnings, reflects working capital being a reduced use of cash in the second quarter of 2023 relative to the second quarter of 2022.

Global supply chains have normalized versus the prior year, which has reduced the rate of working capital expansion necessary to support our customers' growth.

The dollar and percentage change in accounts receivable, net, inventories, and accounts payable as of June 30, 2023 when compared to June 30, 2022 were as follows:

June 30 Twelve-month Dollar Change Twelve-month Percentage Change

2023 2022 2023 2023

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Note - Amounts may not foot due to rounding difference.

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.

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

First, our receivables increased as a result of growth in sales to our customers.

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.

These factors were partly offset by improved receivables quality.

The decrease in our inventory balance in the second quarter of 2023 is primarily attributable to the absence of supply disruptions from the prior year.

Our response at the time was to deepen our inventory as a means of maintaining high service to our customers, particularly for imported inventory.

Dissipation of these disruptions has allowed us to shorten our product ordering cycle.

The decrease in our accounts payable balance in the second 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 second quarter of 2023 versus the second quarter of 2022.

Net Cash Used in Investing Activities

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.

Net cash used in investing activities increased by $10.3 in the second quarter o f 2023 when compared to the second quarter of 2022.

T his was due to higher net capital expenditures (purchases of property and equipment, net of proceeds from sales of property and equipment) in the second quarter of 2023 compared to the second 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 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.

During the second quarter of 2023, our net capital expenditures were $53.9, which is an increase from $43.4 in the second 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.

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:

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

This increase for the full year of 2023 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;

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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.

We expect our spending to trend toward the low end of this range as a result of generally slower business activity.

Net Cash Used in Financing Activities

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.

Net cash used in financing acti vities increased $157.4 in the second quarter of 2023 when compared to the second quarter of 2022.

This is primarily related to a reduction in our debt obligations, versus an increase in our debt obligations in the second quarter of 2022, which reflected strong operating cash generation in the period.

This more than offset a reduction in the second quarter of 2023 of total capital returned to shareholders compared to the second quarter of 2022.

During the second quarter of 2023, we returned $199.9 to our shareholders in the form of dividends, compared to the second quarter of 2022 when we returned $227.8 to our shareholders in the form of dividends ($178.5) and purchases of our common stock ($49.3).

During the second quarter of 2023, we did not repurchase any of our common stock.

During the second quarter of 2022, we purchased 1,000,000 shares of our common stock at an average price of approximately $49.29 per share.

We 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.

Total debt on our balance sheet was $350.0 at the end of the second quarter of 2023, or 9.4% of total capital (the sum of stockholders' equity and total debt).

This compares to $505.0, or 13.7% of total capital, at the end of the second quarter of 2022.

This decrease is due to applying operating cash generation to the reduction of total borrowings on the balance sheet.

Our material cash requirements for known contractual obligations include capital expenditures, 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.

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.

SIX MONTHS ENDED JUNE 30, 2023 VERSUS SIX MONTHS ENDED JUNE 30, 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 June 30:

Six-month Period

Net sales 100.0 % 100.0 %

Gross profit 45.6 % 46.5 %

Operating and administrative expenses 24.6 % 25.3 %

Operating income 21.1 % 21.3 %

Net interest expense -0.2 % -0.1 %

Earnings before income taxes 20.9 % 21.2 %

Note – Amounts may not foot due to rounding difference.

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

Six-month Period

Net sales $ 3,742.2 3,482.6

Percentage change 7.5 % 19.1 %

Business days 128 128

Daily sales $ 29.2 27.2

Percentage Change 7.5 % 18.1 %

Daily sales impact of currency fluctuations -0.5 % -0.3 %

Net sales increased $259.6, or 7.5%, in the first six months of 2023 when compared to the first six months of 2022.

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

We experienced higher unit sales during the period that contributed to the increase in net sales in the period.

Foreign exchange negatively affected sales in the first six months of 2023 by approximately 50 basis points.

We estimate that adverse weather reduced our growth by approximately 10 basis points during the six-month period.

The overall impact of product pricing on net sales was 240 to 270 basis points during the first six months of 2023.

This reflects the carryover of broad actions taken in the first quarter of 2022 and targeted actions taken in the first quarter of 2023 to mitigate the effects of higher transportation and material costs for our products as well as the impact of general inflationary conditions in the marketplace over the past twelve months.

T he impact of product pricing on net sales wa s 620 to 650 bas is points during the first six months of 2022 .

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:

Six-month Period

2023 2022 2023 2022

Fasteners 3.4 % 22.8 % 33.1 % 34.4 %

Safety supplies 6.8 % 14.5 % 20.5 % 20.7 %

Other 11.1 % 15.9 % 46.4 % 44.9 %

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:

Six-month Period

2023 2022 2023 2022

Manufacturing 12.3% 23.5% 74.7% 71.5%

Non-residential construction -5.7% 12.3% 9.2% 10.5%

Other -3.8% 3.9% 16.1% 18.0%

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 six months of 2023 over the prior year, as our sales grew at 76 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:

Six-month Period

2023 2022 2023 2022

National Accounts 12.0 % 22.8 % 59.3 % 57.2 %

Non-National Accounts 1.8 % 12.6 % 40.7 % 42.8 %

Growth Drivers

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

Six-month Period

2023 2022 Change

Weighted FASTBin/FASTVend signings (MEUs) 12,695 10,818 17.4 %

Signings per day 99 85

Weighted FASTBin/FASTVend installations (MEUs;

end of period) 107,115 96,872 10.6 %

FASTStock sales $ 474.4 405.8 16.9 %

% of sales 12.5 % 11.5 %

FASTBin/FASTVend sales $ 1,024.3 845.3 21.2 %

% of sales 27.0 % 24.0 %

FMI sales $ 1,498.7 1,251.1 19.8 %

FMI daily sales $ 11.7 9.8 19.8 %

% of sales 39.6 % 35.5 %

Daily sales through eCommerce grew 46.5% in the first six months of 2023 and represented 22.6% of our total revenues in the period.

Our Digital Footprint in the first six months of 2023 represented 54.7% of our sales, an increase from 47.5% of sales in the first six months of 2022.

In the first six months of 2023, our gross profit, as a percentage of net sales, declined to 45.6% from 46.5% in the first six months of 2022 .

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

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

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

This impact widened on a sequential basis.

Second, 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.

Third, lower product margins in certain of our other products, a result of elevated costs and supply chain normalization for products with lower supply chain visibility, produced some gross profit margin pressure.

Fourth, freight expenses were favorable, partially offsetting the negative impacts of mix, organizational/overhead costs, and price/cost.

This was from shipping costs related to importing product from overseas suppliers being below prior year levels, the reduced volume of containers being imported from overseas suppliers, 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, declined to 21.1% in the first six months of 2023 from 21.3% in the first six months of 2022 .

The operating leverage we achieved in the second quarter of 2023 was not sufficient to offset the decline in our gross profit percentage.

Operating and Administrative Expenses

Our operating and administrative expenses, as a percentage of net sales, improved to 24.6% in the first six months of 2023 from 25.3% in the first six months of 2022 .

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

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

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

Employee-related expenses 70% to 75% 3.4 %

Occupancy-related expenses 15% to 20% 6.3 %

All other operating and administrative expenses 10% to 15% 8.9 %

In the first six months of 2023, our employee-related expenses increased when compared to the first six months of 2022.

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

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

We also experienced higher healthcare costs and, to a lesser degree, 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 period:

In-market locations (branches & Onsites) 12,380 12,017 3.0 %

Non-in-market selling 2,613 2,459 6.3 %

Selling subtotal 14,993 14,476 3.6 %

Distribution/Transportation 3,053 2,971 2.8 %

Manufacturing 723 696 3.9 %

Organizational support personnel (1)

1,862 1,711 8.8 %

Non-selling subtotal 5,638 5,378 4.8 %

Total 20,631 19,854 3.9 %

(1) 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 (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.

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

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.

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

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

This was partly offset by lower fuel costs related to our local truck fleet.

Net Interest Expense

Our net interest expense was $5.8 in the first six months of 2023, compared to $4.9 in the first six months of 2022 .

This increase was due to slightly lower average borrowings during the period being more than offset by higher average interest rates paid on those borrowings.

We recorded income tax expense of $189.2 in the first six months of 2023, or 24.2% of earnings before income taxes.

Income tax expense was $179.8 in the first six months of 2022 , or 24.4% of earnings before income taxes.

Our net earnings during the first six months of 2023 were $593.1, an increase of 6.6% when compared to the first six months of 2022 .

Our diluted net earnings per share were $1.04 during the first six months of 2023, which increased from $0.96 during the first six months of 2022 .

Liquidity and Capital Resources

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

Six-month Period

2023 2022 Change

Net cash provided by operating activities $ 690.6 381.2 81.2 %

Percentage of net earnings 116.4 % 68.5 %

Net cash used in investing activities $ 85.2 77.1 10.5 %

Percentage of net earnings 14.4 % 13.8 %

Net cash used in financing activities $ 592.2 285.4 107.5 %

Net Cash Provided by Operating Activities

Net cash provided by operating activities increased by $309.4 in the first six months of 2023 when compared to the first six months of 2022.

The improvement in operating cash flow, as a percent of net earnings, reflects working capital being a reduced use of cash in the first six months of 2023 relative to the first six months of 2022.

Global supply chains have normalized versus the prior year, which has reduced the rate of working capital expansion necessary to support our customers' growth.

Net Cash Used in Investing Activities

Net cash used in investing activities increased by $8.1 in the first six months of 2023 when compared to the first six months of 2022.

This was primarily due to a slight decline in proceeds from sales of property and equipment in the first six months of 2023 compared to in the first six months of 2022.

During the first six months of 2023, our net capital expenditures were $84.8, which is an increase from $76.5 in the first six months of 2022.

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

This increase for the full year of 2023 reflects primarily:

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

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

We expect our spending to trend toward the low end of this range as a result of generally slower business activity.

Net Cash Used in Financing Activities

Net cash used in financing activities increased by $306.8 in the first six months of 2023 when compared to the first six months of 2022.

This is primarily related to a reduction in our debt obligations, versus an increase in our debt obligations in the first six months of 2022, which reflected strong operating cash generation in the period.

During the first six months of 2023, we returned $399.7 to our shareholders in the form of dividends, compared to the first six months of 2022 when we returned $406.2 to our shareholders in the form of dividends ($356.9) and purchases of our common stock ($49.3).

During the first six months of 2023, we did not repurchase any of our common stock.

During the first six months of 2022, we purchased 1,000,000 shares of our common stock at an average price of approximately $49.29 per share.

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.

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

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

Our forward-looking statements generally relate to our expectations and beliefs regarding the business environment in which we operate, our projections of future performance, our perceived marketplace opportunities, our strategies, goals, mission and vision, 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, the impact of price increases on overall sales growth or margin performance, and our ability to grow our business through the enhancement of sales through our Digital Footprint.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis