What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-17 compared with 2023-07-18 · 188 added, 177 removed, 247 unchanged (60% 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 more than 3,300 in-market locations.

We distribute these supplies through a network of approximately 3,400 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 six-month and three-month periods ended June 30, 2023 and 2022 .

Six-month Period Three-month Period

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

Nine-month Period Three-month Period

2023 2022 Change 2023 2022 Change

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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 13,668 13,668 0.0 % 13,410 1.9 % 13,134 4.1 %

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

Total absolute employee headcount 22,913 22,820 0.4 % 22,386 2.4 % 21,629 5.9 %

Total FTE employee headcount 20,631 20,262 1.8 % 19,854 3.9 % 19,523 5.7 %

Total selling personnel - absolute employee headcount 16,261 16,302 -0.3 % 15,898 2.3 % 15,662 3.8 %

Total selling personnel - FTE employee headcount 14,750 14,993 -1.6 % 14,476 1.9 % 14,284 3.3 %

Total personnel - absolute employee headcount 22,862 22,913 -0.2 % 22,386 2.1 % 22,025 3.8 %

Total personnel - FTE employee headcount 20,284 20,631 -1.7 % 19,854 2.2 % 19,519 3.9 %

Number of branch locations 1,615 1,635 -1.2 % 1,683 -4.0 % 1,716 -5.9 %

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During the last twelve months, we increased our total FTE employee headcount by 765.

This reflects an increase in our in-market and non-in-market selling FTE employee headcount of 655 to support growth in the marketplace and sales initiatives targeting customer acquisition.

We had an increase in our distribution center FTE employee headcount of 181 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 272 that relates primarily to personnel investments in information technology, manufacturing, and operational support, such as purchasing and product development.

This reflects an increase in our total FTE selling personnel of 466 to support growth in the marketplace and sales initiatives targeting customer acquisition.

We had an increase in our distribution and transportation FTE personnel of 95 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 personnel of 204 that relates primarily to personnel investments in information technology, manufacturing, and operational support, such as purchasing and product development.

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.

Six-month Period Three-month Period

Nine-month Period Three-month Period

2023 2022 2023 2022

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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.

SECOND QUARTER OF 2023 VERSUS SECOND QUARTER OF 2022

THIRD QUARTER OF 2023 VERSUS THIRD 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 June 30:

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

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 June 30, 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 September 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 -0.1 % -0.6 %

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 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.

Net sales increased $43.5, or 2.4%, in the third quarter of 2023 when compared to the third quarter of 2022.

There was one fewer selling day in the quarter relative to the prior year period and, taking this into consideration, our net daily sales growth increased 4.0% in the third quarter of 2023 compared to the third quarter of 2022.

We experienced higher unit sales in the third quarter of 2023 that was primarily due to growth at our Onsite locations, particularly those opened in the last two years.

This more than offset the impact of softer end market demand on our manufacturing customers and lower revenues to construction and reseller customers.

Foreign exchange negatively affected sales in the third quarter of 2023 by approximately 10 basis points.

The impact of product pricing on net sales in the third quarter of 2023 was modestly positive, consistent with historical trends, as compared to the impact of product pricing on net sales in the third quarter of 2022 of 550 to 580 basis points.

Incremental pricing actions over the past twelve months have been of modest scope, resulting in mostly stable price levels through the third quarter of 2023.

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.

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

We experienced increasing divergence in the performance of our fastener versus our non-fastener product lines in the third quarter of 2023, which we believe relates to two factors.

First, fasteners are more heavily oriented toward production of final goods than maintenance, which results in greater susceptibility to weaker manufacturing end markets.

Second, pricing for fasteners has decelerated at a faster pace than non-fastener products.

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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Other 6.8 % 15.4 % 46.5 % 45.4 %

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

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

We continued to experience a significant divergence in the performance of our manufacturing end market versus our non-manufacturing end markets in the third quarter of 2023.

We are growing relatively faster with key account customers, particularly Onsites, with significant managed spend where our service model and technology is particularly impactful, which disproportionately benefits manufacturing 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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2023 2022 2023 2022

Manufacturing 10.4% 23.1% 74.8% 71.8%

Heavy manufacturing 9.0 % 25.4 % 43.2 % 41.3 %

Other manufacturing 2.5 % 19.1 % 31.1 % 31.6 %

Non-residential construction -7.2 % 5.2 % 9.1 % 10.2 %

Other -3.2% 4.7% 16.0% 17.5%

Reseller -6.9 % 3.7 % 5.8 % 6.5 %

Other end markets 8.1 % -4.3 % 10.8 % 10.4 %

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 second quarter of 2023 over the prior year, as our sales grew at 73 of our Top 100 national account customers.

We continued to experience a significant divergence in the performance of our national account customers versus our non-national account customers, which relates to the relative growth of our sales through Onsite locations and larger, key accounts.

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 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.

• We signed 93 new Onsite locations (defined as dedicated sales and service provided from within, or in proximity to, the customer's facility) in the third quarter of 2023, resulting in 268 year-to-date signings of new Onsite locations.

We had 1,778 active sites on September 30, 2023, which represented an increase of 13.5% from September 30, 2022.

Daily sales through our Onsite locations, excluding sales transferred from branches to new Onsites, grew at a low double-digit rate in the third quarter of 2023 over the third quarter of 2022.

This growth is primarily due to contributions from Onsites activated and implemented in 2022 and 2023.

Based on the signings in the first nine months of 2023, we currently expect to sign approximately 350 new Onsite locatio ns for the full year of 2023.

• 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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% of sales 40.7 % 36.9 %

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

Our goal for weighted FASTBin and FASTVend device signings in 20 23 remains between 23,000 to 25,000 M EUs.

• 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 44.7% in the second quarter of 2023 and represented 23.3% of our total sales in the period.

Daily sales through eCommerce grew 41.3% in the third quarter of 2023 and represented 24.5% 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 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.

Our Digital Footprint in the third quarter of 2023 represented 57.1% of our sales, an increase from 49.5% of sales in the third quarter of 2022.

Our gross prof it, as a percentage of net sales, was unchanged at 45.9% in the third q uarter of 2023 from 45.9% in the third quarter of 2022.

Customer and product mix had a negative effect on 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.

This was offset by a number of favorable variables.

First, we continue to experience favorable freight costs, which reflects elevated 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.

Second, in the third quarter of 2022 we had a $3.4 write-down of pandemic-related gloves that did not recur in the third quarter of 2023.

Third, we experienced slightly positive price-cost.

This reflects moderating product costs, as we took no meaningful pricing actions in the period, and an easy comparison, as it largely recaptures the price-cost deficit experienced in the third quarter of 2022.

Operating Income

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.

Our operating income, as a percentage of net sales, was unchanged at 21.0% in the third quarter of 2023 from 21.0% in the third quarter of 2022.

Operating and Administrative 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.

Our operating and administrative expenses, as a percentage of net sales, increased to 25.0% in the third quarter of 2023 from 24.8% in the third quarter of 2022.

This largely reflects an increase, as a percentage of net sales, in other operating and administrative expenses.

Our ability to leverage was adversely impacted by slow sales growth, which made it difficult to leverage spending on certain business initiatives and investments.

Our ability to leverage was also limited by having one less selling day in the third quarter of 2023 than we had in the third quarter of 2022, as most of our operating expenses will not vary based on the number of selling days in a given period.

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

In the third quarter of 2023, our employee-relate d expenses increased when com pared to the third 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 healthcare-related costs.

This was partly offset by bonus and commission payments declining to reflect the impact of slower sales and profit growth versus the prior year.

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:

In-market locations (branches & Onsites) 12,380 12,219 1.3 % 12,039 2.8 %

Non-in-market selling 2,613 2,485 5.2 % 2,299 13.7 %

Selling subtotal 14,993 14,704 2.0 % 14,338 4.6 %

Distribution/Transportation 3,053 3,029 0.8 % 2,872 6.3 %

Manufacturing 723 714 1.3 % 672 7.6 %

Total selling personnel (1)

14,750 14,993 -1.6 % 14,284 3.3 %

Distribution/Transportation personnel 2,984 3,053 -2.3 % 2,889 3.3 %

Manufacturing personnel 704 723 -2.6 % 671 4.9 %

Organizational support personnel (1)

1,846 1,862 -0.9 % 1,675 10.2 %

Non-selling subtotal 5,638 5,558 1.4 % 5,185 8.7 %

Total 20,631 20,262 1.8 % 19,523 5.7 %

Total personnel 20,284 20,631 -1.7 % 19,519 3.9 %

(1) Of our Total Selling Personnel, 80%-85% are attached to a specific in-market location.

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.;

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

(2) Information Technology personnel (35% to 40% of category);

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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 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.

(1) building rent and depreciation, (2) building utility costs, (3) equipment related to our branches and distribution locations, and (4) industrial vending equipment and bins utilized as part of our FMI services (we consider this hardware 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 2023, our occupancy-related expenses increased when compared to the third quarter of 2022.

We continue to experience rising rent costs for our buildings due to inflation and upsizing of branches.

At the same time, slowing in the pace of branch closings is resulting in a moderating level of incremental cost reduction to offset these increases.

We also had higher costs for FMI hardware as we continue to expand our installed base of such hardware.

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 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.

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

The increase in other operating and administrative expenses relates primarily to higher spending on information technology, higher bad debt expense, and higher general insurance costs.

Net Interest Expense

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.

Our net interest expense was $1.3 in the third quarter of 2023, compared to $3.9 in the third quarter of 2022.

We had higher interest income, reflecting higher cash balances through the period and higher rates paid on those balances.

We also had lower interest expense, reflecting lower average borrowings through the period, as well as slightly lower average interest rates.

We recorded income tax expense of $89.9 in the third quarter of 2023, or 23.4% of earnings before income taxes.

During the third quarter of 2023, the liability for unrecognized tax benefits decreased $3.9 due to the lapse of statute of limitations, of which $3.8 impacted the effective tax rate.

Income tax expense was $90.7 in the third 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 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.

Our net earnings during the third quarter of 2023 were $295.5, an increase of 3.8% compared to the third quarter of 2022.

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

Liquidity and Capital Resources

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

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

Three-month Period

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Net Cash Provided by Operating Activities

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

Net cash provided by operating activities increased $130.2 in the third quarter of 2023 when compared to the third quarter of 2022.

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

This reflects the normalization of global supply chains versus the prior year and, to a lesser degree, slower business activity, which combine to reduce 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 September 30, 2023 when compared to September 30, 2022 were as follows:

September 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 second quarter of 2023 is primarily attributable to two factors.

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

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

First, our receivables inc reased 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.

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.

The decrease in our inventory balance in the third 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.

It is also likely that slower business activity is reducing the level of inventory our customers require us to maintain to meet their production needs.

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

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

Net Cash Used in Investing Activities

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.

Net cash used in investi ng activities decreased by $1.5 in the third quarter of 2023 when compared to the third quarter of 2022.

This was due to lower net capital expenditures (purchases of property and equipment, net of proceeds from sales of property and equipment) in the third quarter of 2023 compared to the third 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 second quarter of 2023, our net capital expenditures were $53.9, which is an increase from $43.4 in the second quarter of 2022.

During the third quarter of 2023, our net capital expenditures were $42.9, which is a decrease from $44.4 in the third 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 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;

(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.

For the full year of 2023, we expect our investment in property and equipment, net of proceeds from sales, to be within a range of $180.0 to $190.0.

This is a decline from our prior range of $210.0 to $230.0 reflecting a deferral of several distribution center-related proj ects.

This new range represents an increase from $162.4 in 2022, due primarily to investments in fleet equipment to support our network of heavy trucks and an increase in spending on information technology.

Net Cash Used in Financing Activities

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.

Net cash used in financing ac tivities increased $66.1 in the third quarter of 2023 when compared to the third quarter of 2022.

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

This was only partly offset by a reduction in the third quarter of 2023 of total capital returned to shareholders compared to the third quarter of 2022.

During the third quarter of 2023, we returned $199.8 to our shareholders in the form of dividends, compared to the third quarter of 2022 when we returned $272.8 to our shareholders in the form of dividends ($177.5) and purchases of our common stock ($95.3).

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

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 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 $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.

Total debt on our balance sheet was $260.0 at the end of the third quarter of 2023, or 7.0% of total capital (the sum of stockholders' equity and total debt).

This compares to $555.0, or 14.9% of total capital, at the end of the third quarter of 2022.

This decrease is due to applying operating cash generated 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

NINE MONTHS ENDED SEPTEMBER 30, 2023 VERSUS NINE MONTHS ENDED SEPTEMBER 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

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 %

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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 June 30, and changes in such sales from the prior period to the more recent period:

Six-month Period

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 $ 5,588.1 5,285.0

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Daily sales impact of currency fluctuations -0.4 % -0.4 %

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.

Net sales increased $303.1, or 5.7%, in the first nine months of 2023 when compared to the first nine months of 2022.

There was one fewer selling day in the first nine months of 2023 relative to the prior year period and, taking this into consideration, our net daily sales growth increased 6.3% in the first nine months of 2023 compared to the first nine months of 2022.

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 was primarily due to growth at our Onsite locations, with the strongest contribution from those sites opened in the last two years and a more modest contribution from more mature locations.

This more than offset the impact of softer end market demand on our manufacturing customers and lower revenues to construction and reseller customers.

Foreign exchange negatively affected sales in the first nine months of 2023 by approximately 40 basis points.

We estimate that adverse weather in the first quarter of 2023 reduced our growth by approximately 10 basis points during the nine-month period.

The overall impact of product pricing on net sales was 190 to 220 basis points during the first nine months of 2023.

While product pricing has been positive throughout 2023, the impact was greatest in the first two quarters of the period.

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 .

The impa ct of product pricing on net sales wa s 600 to 630 bas is points during the first nine 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.

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

In the first nine months of 2023, fastener daily sales grew at a slower rate than our other product categories, which we believe relates to two factors.

First, fasteners are more heavily oriented toward production of final goods than maintenance, which results in greater susceptibility to weaker manufacturing end markets.

Second, pricing for fasteners has decelerated at a faster pace than non-fastener products.

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

Nine-month Period

2023 2022 2023 2022

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Other 9.6 % 15.7 % 46.4 % 45.1 %

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

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

We continued to experience a significant divergence in the performance of our manufacturing end market versus our non-manufacturing end markets in the first nine months of 2023.

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

Nine-month Period

2023 2022 2023 2022

Manufacturing 12.3% 23.5% 74.7% 71.5%

Heavy manufacturing 13.1 % 26.1 % 43.2 % 40.7 %

Other manufacturing 6.5 % 19.5 % 31.3 % 31.3 %

Non-residential construction -6.2 % 9.8 % 9.2 % 10.4 %

Other -3.8% 3.9% 16.1% 18.0%

Reseller -7.1 % 4.2 % 5.9 % 6.7 %

Other end markets 1.5 % 0.9 % 10.4 % 10.9 %

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

Nine-month Period

2023 2022 2023 2022

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

Six-month Period

Nine-month Period

2023 2022 Change

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% of sales 39.9 % 36.0 %

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.

Daily sales through eCommerce grew 44.6% in the first nine months of 2023 and represented 23.2% of our total revenues in the period.

Our Digital Footprint in the first nine months of 2023 represented 55.5% of our sales, an increase from 48.2% of sales in the first nine months of 2022.

In the first nine months of 2023, our gross profit, as a percentage of net sales, declined to 45.7% from 46.3% in the first nine months of 2022 .

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

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

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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.

Second, higher organizational/overhead costs reduced our gross profit percentage, primarily due to higher inbound freight costs and working capital needs being relieved from inventory and generating higher period costs.

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

This reflected strong domestic freight revenue over the period, which leveraged what are relatively stable costs to support our captive fleet, lower expenses related to external freight providers, and lower fuel costs.

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.

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

The operating leverage we achieved during the period 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 .

Our operating and administrative expenses, as a percentage of net sales, improved to 24.7% in the first nine months of 2023 from 25.1% in the first nine 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

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

Employee-related expenses 70% to 75% 2.8 %

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All other operating and administrative expenses 10% to 15% 9.6 %

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.

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

We experienced an increase in employee base pay due to higher average FTE and average wages during the period, as well as higher healthcare costs and, to a lesser degree, profit sharing costs.

This was only partly offset by a decrease in bonus and commission payments reflecting the impact of slower sales and profit growth versus the prior year.

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 %

Total selling personnel (1)

14,750 14,476 1.9 %

Distribution/Transportation personnel 2,984 2,971 0.4 %

Manufacturing personnel 704 696 1.1 %

Organizational support personnel (1)

1,846 1,711 7.9 %

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

Total 20,631 19,854 3.9 %

Total personnel 20,284 19,854 2.2 %

(1) Of our Total Selling Personnel, 80%-85% are attached to a specific in-market location.

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.;

(1) Sales & Growth Driver Support personnel (approximately 35% 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.

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

The most significant contributor to this increase was higher cost for FMI hardware as we continue to expand our installed base of such hardware.

We also have experienced rising rent costs for our buildings due to inflation and the upsizing of branches, even as the slowing pace of branch closings is resulting in a moderating level of incremental cost reduction to offset these increases.

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

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

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 .

Our net interest expense was $7.1 in the first nine months of 2023, compared to $8.9 in the first nine months of 2022 .

We had higher interest income, reflecting higher cash balances through the period and higher rates paid on those balances.

We also had lower interest expense, reflecting lower average borrowings through the period, as well as slightly lower average interest rates.

We recorded income tax expense of $279.2 in the first nine months of 2023, or 23.9% of earnings before income taxes.

During the third quarter of 2023, the liability for unrecognized tax benefits decreased $3.9 due to the lapse of statute of limitations, of which $3.8 impacted the effective tax rate.

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

Our net earnings during the first nine months of 2023 were $888.6, an increase of 5.6% when compared to the first nine months of 2022 .

Our diluted net earnings per share were $1.55 during the first nine months of 2023, which increased from $1.46 during the first nine months of 2022 .

Liquidity and Capital Resources

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

Six-month Period

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

Nine-month Period

2023 2022 Change

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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 provided by operating activities increased by $439.6 in the first nine months of 2023 when compared to the first nine months of 2022.

The improvement in operating cash flow, as a percent of net earnings, reflects working capital being a source of cash in the first nine months of 2023, as opposed to a significant use of cash in the first nine months of 2022.

This reflects the normalization of global supply chains versus the prior year and, to a lesser degree, slower business activity, which combine to reduce the working capital 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 investing activities increased by $6.6 in the first nine months of 2023 when compared to the first nine months of 2022.

This was primarily due to an increase in net capital expenditures (purchases of property and equipment, net of proceeds from sales of property and equipment) in the first nine months of 2023 compared to in the first nine months of 2022.

During the first nine months of 2023, our net capital expenditures were $127.7, which is an increase from $120.9 in the first nine months of 2022.

For the full year of 2023, we expect our investment in property and equipment, net of proceeds from sales, to be within a range of $180.0 to $190.0.

This is a decline from our prior range of $210.0 to $230.0 reflecting a deferral of several distribution center-related proj ects.

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.

Net cash used in financing activities increased by $372.9 in the first nine months of 2023 when compared to the first nine months of 2022.

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

This was only partly offset by a reduction in the first nine months of 2023 of total capital returned to shareholders compared to the first nine months of 2022.

During the first nine months of 2023, we returned $599.5 to our shareholders in the form of dividends, compared to the first nine months of 2022 when we returned $679.0 to our shareholders in the form of dividends ($534.4) and purchases of our common stock ($144.6).

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

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.

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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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