What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-06 compared with 2023-02-07 · 240 added, 295 removed, 439 unchanged (55% of the section changed)

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

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

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

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

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

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

We distribute these supplies through a network of more than 3,400 in-market locations.

Our largest end market is manufacturing.

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

We also service general and commercial contractors in non-residential end markets as well as farmers, truckers, railroads, oil exploration companies, oil production and refinement companies, mining companies, federal, state, and local governmental entities, schools, and certain retail trades.

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

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Lastly, we believe the markets are efficient.

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

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

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

Our approach to addressing these aspects of our marketplace is captured in our motto Growth Through Customer Service ® and our tagline Where Industry Meets Innovation ™ .

The concept of growth is simple:

find more customers every day and increase our activity with them.

find more customers every day that value the services we provide and increase our activity with them.

However, execution is hard work.

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Third, we strive to generate strong profits, which produce the cash flow necessary to support our growth, our product and technology development, and the needs of our customers.

The ultimate aim of this 'high-tech, high-touch' approach to gaining market share is to allow us to get closer to our customers, going so far as to be right to the point of consumption within customers' facilities.

The ultimate aim of this 'high-touch, high-tech' approach to gaining market share is to allow us to get closer to our customers, going so far as to be right to the point of consumption within customers' facilities.

Marrying our presence, capabilities and technologies deepens our relationships and our understanding of our customers' day-to-day opportunities and obstacles.

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Diluted net earnings per share $ 2.02 1.89 6.7 % $ 1.60 17.8 %

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

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

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

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

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

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

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.

2023 was a year of modest economic contraction in our key markets.

The Institute for Supply Management's Purchasing Manager's Index (PMI) for the United States averaged 47.1 for the full year and remained below 50, the threshold demarcating manufacturing growth or contraction, every month.

Industrial Production for the United States reflected moderating business activity, with markets that are most relevant to us, such as Fabricated Metals and Machinery, declining at an accelerating rate through the year.

In addition, inflation in product costing flattened out, with some deflation emerging in fastener products.

The combined effect of these dynamics was to produce daily sales growth in 2023 that slowed appreciably from 2022.

We continued to migrate to a key accounts-focused model, expand our Onsite footprint, grow our installed base of FMI hardware, and lift the proportion of sales that run through our Digital Footprint.

The efficiencies these investments provide and good organizational control of discretionary expenses allowed us to achieve a stable operating profit margin despite the challenges stemming from this slower and less inflationary environment.

We also produced record operating cash flow which, combined with our confidence in the future cash generation capability of our business model, allowed us to pay a supplemental fifth dividend in the fourth quarter of 2023.

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

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

based on 40 hours per week) employee headcount, our investments 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 FMI devices at the end of the periods presented and the percentage change compared to the end of the prior period.

2022 Twelve-month

In-market locations - absolute employee headcount

13,410 12,464 7.6 %

In-market locations - FTE employee headcount 12,017 11,337 6.0 %

Total absolute employee headcount 22,386 20,507 9.2 %

Total FTE employee headcount (1)

Selling personnel - absolute employee headcount

16,512 15,898 3.9 %

Selling personnel - FTE employee headcount 15,070 14,476 4.1 %

Total personnel - absolute employee headcount 23,201 22,386 3.6 %

Total personnel - FTE employee headcount 20,721 19,854 4.4 %

Number of branch locations 1,597 1,683 -5.1 %

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Weighted FMI devices (MEU installed count) 113,138 102,151 10.8 %

102,151 92,874 10.0 %

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

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

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

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

During the last twelve months, we increased our total FTE employee headcount by 867.

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

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

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

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

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

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

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

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

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

This reflects an increase in our total FTE selling personnel of 594 to support growth in the marketplace and sales initiatives targeting customer acquisition.

We had an increase in our distribution and transportation FTE personnel of 124 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 149 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.

Twelve-month Period

Branch openings 10 12

Branch closures, net of conversions (96) (122)

Onsite activations 329 306

Onsite closures, net of conversions (130) (99)

Our in-market network forms the foundation of our business strategy.

In recent years, we have seen a gradual increase in our in-market locations because of significant growth in Onsites and, to a lesser degree international branches, which has more than overcome a meaningful decline in our traditional branch network.

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

We will continue to open or close locations to sustain and improve our network, support our growth drivers, and manage our operating expenses.

However, we believe the strategic rationalization that has produced the meaningful decline in our traditional branch network in the United States and Canada since 2013 is largely completed, and we expect reduced closing activity beginning in 2024.

CURRENT YEAR RESULTS ENDED 2023

Results of Operations

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

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

Net sales 100.0 % 100.0 %

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

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

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

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

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

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

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

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

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

This affected two aspects of our growth during the period.

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

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

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

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

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

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

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

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

The increase in net sales noted above for 2023 was due to higher unit sales of MRO, OEM, and construction supplies, as well as higher pricing as further set forth below.

We believe higher unit sales in 2023 were primarily a result of our ability to gain market share, as most measures of industrial activity were flat to down throughout the period.

Despite this challenging environment, in 2023 we produced net sales growth of 5.2% and, owing to one fewer selling day in the period, daily sales growth of 5.7%.

Growth was led by our transportation customers, which includes sales to transportation services customers as the warehousing operations of retailer-oriented customers, and manufacturing end markets, which benefit disproportionately from our shift to a key account model.

Our non-residential construction and reseller customers contracted during the period, which we believe is due to our shift to a key account model which tends to de-emphasize walk-in, over-the-counter, and infrequent transactions.

Price contributed 160 to 190 basis points to our net sales growth in 2023.

This contribution to growth from price was primarily due to easier comparisons in the first six months of 2023.

For instance, in the first six months of 2023 contribution to growth from price averaged 240 to 270 basis points, while in the third and fourth quarters of 2023 contribution to growth from price averaged 110 to 140 basis points and 50 to 80 basis points, respectively.

We increased total Onsite locations, the installed base of FMI devices, and our Digital Footprint in 2023, which enhanced the value we provide to our customers and supported our growth and efficiency.

The rate of penetration we achieved with these growth drivers was uneven, however.

We signed 326 Onsites in 2023, below our goal at the start of 2023 of 375 to 400 units and slightly below the prior year signings of 356 units.

We signed 24,126 FMI MEUs, meeting our goal at the start of 2023 of 23,000 to 25,000 MEUs and meaningfully above the prior year signings of 20,735 MEUs.

We expanded the proportion of our sales running through our Digital Footprint to 56.1%, below our goal at the start of 2023 of 65.0% but above the prior year level of 49.3%.

Sales by Product Line

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

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 percent of sales in the periods below were as follows:

Fasteners 32.4 % 34.0 %

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Other product lines 46.4 % 45.2 %

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

The shifts in product mix in 2023 compared to 2022 are largely attributable to two factors.

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

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

These dynamics produced a meaningful divergence in the daily sales growth rates of our fastener versus our non-fastener product lines in 2023.

Annual Sales Changes, Sequential Trends, and End Market Performance

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May June July Aug.

Cumulative Change from Jan.

Benchmark (2)

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End Market Performance

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

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

We estimate approximately 70% to 75% of our business is with customers engaged in some type of manufacturing, a significant subset of which finds its way into the heavy equipment market.

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

DSR change - manufacturing customers Q1 Q2 Q3 Q4 Annual

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2022 23.9 % 23.1 % 22.6 % 16.0 % 21.3 %

Our manufacturing business consists of two subsets:

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

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

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

We estimate approximately 25% to 30% of our business is with customers engaged in a wide range of activities, none of which individually constitute 10% of sales.

This includes non-residential construction, reseller, transportation, and government customers.

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

DSR change - non-manufacturing customers Q1 Q2 Q3 Q4 Annual

2023 -3.7 % -5.3 % -1.3 % 0.9 % -2.4 %

2022 6.9 % 6.9 % 1.0 % -0.8 % 3.5 %

Product Performance

Our products fall into two functional subsets:

(1) original equipment manufacturing (OEM) parts, which become part of a customer's finished good and (2) maintenance, repair, and operation (MRO), which maintain the facilities and equipment used by our customers.

While certain products in our other product categories have an OEM application, such as welding consumables or metal cutting carbides, the majority of our sales for OEM applications are of fasteners.

As a result, the best way to understand the change in our production business is to examine the results in our fastener product line (which represents 30% to 35% of our business).

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

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2022 24.6 % 21.2 % 18.2 % 9.1 % 18.1 %

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

By contrast, while we do sell significant quantities of MRO fasteners, the best way to understand the change in our MRO business is to examine the results in our non-fastener product lines, which include safety, tools, janitorial, and other products.

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

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2022 15.0 % 16.0 % 14.4 % 11.6 % 14.2 %

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

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

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

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

Our non-fastener business is not immune to the impact of industrial cycles, but because it is more dependent on whether a facility is operating than how much product that facility is producing, it does tend to exhibit less volatility in its growth than our fastener business.

We also expect growth of our non-fastener products to outperform growth of our fastener products over the course of a cycle.

This reflects three things:

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

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

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

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

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

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

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

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

The gross profit percentage during each period was as follows:

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2022 46.6 % 46.5 % 45.9 % 45.3 % 46.1 %

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

This decrease was primarily related to three factors.

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

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

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

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

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

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

Our gross profit, as a percentage of net sales, was 45.7% in 2023 and 46.1% in 2022.

This decrease was primarily related to two factors.

First, in 2023 customer and product mix had a negative effect on our gross profit percentage.

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

Second, we had higher organizational/overhead costs, including from higher inbound freight costs and working capital needs being relieved from inventory and generating higher period costs.

These negative effects were partly offset by 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.

Operating and Administrative Expenses

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

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

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

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

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

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

Our operating and administrative expenses, as a percentage of net sales, improved to 24.9% in 2023 from 25.2% in 2022.

This primarily reflected improvement, as a percentage of net sales, in employee-related expenses as bonuses and commissions were down as a result of slower sales and profit growth in 2023 versus the prior year.

The 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 Twelve-month Period

Employee-related expenses 70% to 75% 3.4 % 14.7 %

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Our employee-related expenses increased in 2023 from 2022.

This was related to:

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

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

and an increase in our profit sharing contribution.

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

This was related to higher base pay and employment taxes as a result of increased FTE during the period and moderate wage inflation.

This was partly offset by a decline in bonuses reflecting slower sales and profit growth versus the prior year.

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

Twelve-month Period

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

Non-in-market selling (1)

Selling subtotal 7.9 % 1.7 %

Distribution/Transportation 8.4 % 5.8 %

Manufacturing 12.4 % 2.0 %

Selling personnel (1)

Distribution/Transportation personnel 4.2 % 8.4 %

Manufacturing personnel 0.1 % 12.4 %

Organizational support personnel (2)

Non-selling subtotal 9.3 % 5.8 %

Total 8.3 % 2.8 %

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

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

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

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

Total personnel 4.4 % 8.3 %

Of our 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).

(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 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).

Our occupancy-related expenses increased in 2023 from 2022.

This was related to:

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

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

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

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

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

and a slight rise in branch rents related to higher inflation and branch size.

All other operating and administrative expenses include:

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

Combined, all other operating and administrative expenses increased in 2023 from 2022.

This was related to:

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

higher spending on information technology;

higher spending on travel, meals, and supplies;

and higher general insurance expense.

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

Net Interest Expense

higher general insurance costs;

increased spending on travel and supplies;

and higher bad debt expense.

These elements were only partly offset by increased contributions from our supplier collaboration programs and increased income from asset sales related to our field truck fleet .

Our net interest expense was $6.7 in 2023 compared to $13.6 in 2022.

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

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

We carried lower average debt balances in 2023 relative to the prior year, with cash generated from working capital reductions enabling us to reduce outstanding revolver debt under our Credit Facility.

This was only partly offset by slightly higher average rates against borrowings under our Credit Facility due to changing interest rate levels in the marketplace.

We also generated higher interest income in 2023 relative to the prior year.

We recorded income tax expense of $367.0 in 2023, or 24.1% of earnings before income taxes, compared to $353.1 in 2022, or 24.5% of earnings before income taxes.

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

The decrease in our tax rate in 2023 is due primarily to an increase in the tax benefit associated with the exercise of stock options.

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

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Tax Rate 24.1 % 24.5 %

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

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

During 2023, net earnings per share increased, primarily due to higher sales, lower net interest expense, a lower tax rate, and lower average fully diluted shares outstanding as a result of our buying back shares in 2022.

Liquidity and Capital Resources

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% of net earnings 124.0 % 86.6 %

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

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

In 2023, we experienced an increase in our operating cash flow as a percentage of net earnings.

The improvement in operating cash flow in 2023, as a percent of net earnings, reflects the reduced demand for working capital as a result of an improved supply chain and, to a lesser degree, slower business activity relative to the prior year.

Trade Working Capital Assets

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

Twelve-month Dollar Change Twelve-month Percentage Change

Dollar Change Twelve-month

Percentage Change

2023 2023 2023

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Trade working capital, net $ 2,346.2 (120.1) -4.9 %

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

Net sales in last three months $ 1,758.6 63.0 3.7 %

Note – Amounts may not foot due to rounding difference.

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

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

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

In 2023, the annual growth in net accounts receivable is primarily attributable to three 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.

Third, and to a lesser degree, customers have historically delayed payments at the end of years that are economically challenged, and we saw that effect in 2023.

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

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

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

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

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

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

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

In 2023, our inventories decreased, reflecting the absence of supply chain 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.

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

In 2023, the annual growth in accounts payable was primarily attributable to our product purchases increasing to support the growth in our business.

The growth in our accounts payable balance is below the growth in our sales, which reflects the dissipation of supply chain disruptions from the prior year.

This allowed us to shorten our product ordering cycle in 2023 versus 2022.

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

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% of net earnings 14.0 % 15.0 %

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

Our net cash used in investing activities in 2023 was comparable to 2022 and primarily related to investments for net capital expenditures.

Property and equipment expenditures typically consist primarily of:

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% of net earnings 13.9 % 14.9 %

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

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

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

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

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

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

This increase from 2022 reflects:

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

the beginning of construction of a distribution center in Utah;

investment in materials to facilitate our branch conversion projects;

higher spending on information technology;

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

Our net capital expenditures in 2023 were comparable to 2022, though they were below our original expectations for net capital investment during the year.

The slower business environment in 2023 reduced the need to purchase certain equipment at the pace originally anticipated.

We also saw the timing of certain outlays pushed out and, to a lesser extent, longer lead times on certain materials.

It does not reflect the cancellation of any significant initiatives, and much of the spending is expected to occur in 2024 when we see our investment in property and equipment, net of proceeds from sales, being in a range of $225.0 to $245.0.

This increase reflects spending to complete our Utah distribution center, investments in picking technology and equipment in our hubs and branches, higher outlays for FMI hardware reflecting our higher targeted signings and a slight build in device inventory, and an increase in spending on information technology.

Net Cash Used in Financing Activities

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

Net cash used $ 774.9 627.1

% of net earnings 71.3 % 67.8 %

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

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

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

The increase in net cash used in financing activities reflects higher dividend payments, including a supplemental payment in December of 2023, and a reduction in our outstanding debt obligations.

These uses of cash were only partly offset by the absence of common stock purchases that we made in the prior year and, to a lesser degree, the exercise of stock options.

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

Cash dividends paid $ 1,016.8 711.3

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% of net earnings -2.6 % -0.8 %

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

Debt obligations payments (proceeds), net $ 295.0 (165.0)

% of net earnings 25.5 % -15.2 %

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Stock Purchases

In 2023, we did not purchase any of our common stock.

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

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

We 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.

We declared a quarterly dividend of $0.39 per share on January 17, 2024.

In 2023, we paid aggregate annual dividends per share of $1.78.

This included $1.40 per share in regular quarterly dividends and a $0.38 per share special dividend paid in December 2023 reflecting what was at the time our high cash balances, as well as our favorable outlook for future cash generation.

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

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

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

Our borrowings under the Credit Facility and Master Note Agreement peaked during each quarter of 2023 as follows:

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Unremitted Foreign Earnings

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

subsidiaries.

Approximately $213.2 of cash and cash equivalents were held by non-U.S.

subsidiaries on December 31, 2023.

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

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Effects of Inflation

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

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

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

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

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

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

In 2023, we observed easing in inflationary pressures for metals (especially steel), energy, and transportation services (especially overseas containers and shipping) resulting in stable costs for most of our product offering.

As a result, we did not institute any broad pricing actions through 2023 and we saw our contribution to growth in daily sales due to price moderate throughout the year.

The exception to this stability was cost deflation for imported goods, which resulted in modest price deflation specifically in our fastener product line over the course of the year.

The net effect on our gross profit percentage of these trends in cost and price inflation was immaterial in 2023.

PRIOR YEAR RESULTS ENDED 2022

Results of Operations

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

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

Net sales 100.0 % 100.0 %

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

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Daily sales impact of currency fluctuations -0.5 % 0.6 %

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

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

Although economic strength was fairly consistent throughout the year, our growth patterns were not, primarily due to comparisons related to the timing of pandemic-related PPE sales in the previous year.

For instance, our daily sales growth in the first half of 2021 was 2.5%.

Our cyclical product categories substantially outperformed this, as exemplified by fastener daily sales growth of 15.4% in the first half of 2021.

However, this was mostly offset by the absence of significant spending for PPE that occurred in the previous period, which is best illustrated by safety products' daily sales decline of 20.2% in first half of 2021.

By contrast, our daily sales growth in the second half of 2021 was a much stronger 12.3%.

Our cyclical product categories continued to outperform with fastener daily sales having grown 22.2% in the second half of 2021.

While certain products and markets within our business continued to face difficult PPE comparisons, they were not as severe as what had been experienced in the first half of 2021, which allowed our safety products to post daily growth of 0.3% in the second half of 2021.

Our growth drivers also returned to contributing meaningfully to higher unit sales in 2021, due to strong business activity within our customer base and, to a lesser degree, a higher installed base of FMI devices.

Our number of active Onsites increased 11.9%, for instance, while Onsite daily sales growth was 20.6%.

Similarly, our installed base of FMI MEUs increased 10.6%, while FMI daily sales growth was 41.0%.

While demand was strong throughout 2021, the year experienced certain disruptions.

The first were supply chain constraints, as the rapid recovery in demand resulted in shortages in production and shipping capacity.

The second was labor shortages, which were particularly acute in the market for part-time employees.

The third was the ongoing COVID-19 pandemic, which continued to produce periodic surges in infection rates.

While businesses largely managed through these events as opposed to stopping production, the instability it created in worker availability exacerbated the pre-existing supply chain and labor challenges.

The fourth was inflation in material costs, overseas and domestic transportation expenses, and labor wage rates.

We believe the most significant impact of these disruptions was on our growth driver signings.

We signed 274 Onsites in 2021, above the prior year (223 signings) but well below our goal at the start of 2021 of 375 to 400 units.

Similarly, we signed 19,311 FMI MEUs, above the prior year (16,503 MEUs), but well below our goal at the start of the year of 23,000 to 25,000 MEUs.

We believe many of our customers were diverting significant energy to managing the effects of supply chain, labor, COVID-19, and inflation in the short term, and it lengthened the sales cycle for our supply chain solutions.

Price contributed 200 to 230 basis points to our net sales growth in 2021.

We instituted a number of pricing events during 2021 as a means of mitigating rising product and transportation costs.

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

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

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

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

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

This affected two aspects of our growth during the period.

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

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

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

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

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

Sales by Product Line

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

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 percent of sales in the periods below were as follows:

Fasteners 34.0 % 33.3 %

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Other product lines 45.2 % 45.5 %

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

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

The effect was to reduce our mix of sales coming from fasteners and other product lines while increasing the mix of sales coming from safety products.

In 2021, these dynamics reversed with economic recovery generating strong growth in our cyclical product lines while the absence of surge sales and stabilization in the supply chain for PPE restrained growth in safety products.

The effect was to increase our mix of sales coming from fasteners and other product lines while reducing the mix of sales coming from safety products.

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

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

Annual Sales Changes, Sequential Trends, and End Market Performance

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

However, we do not believe that fully explains the exaggerated delta between the sequential rates of change and the benchmark from March 2020 to July 2020.

We believe deviation of this duration and order of magnitude is uncharacteristic in our business and is related to the dramatic impacts of the pandemic in that period.

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

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May June July Aug.

Cumulative Change from Jan.

Benchmark (2)

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2021 5.6 % 24.5 % 20.8 % 23.8 % 18.4 %

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

DSR change - non-manufacturing customers Q1 Q2 Q3 Q4 Annual

2022 6.9 % 6.9 % 1.0 % -0.8 % 3.5 %

2021 4.9 % -30.7 % -8.2 % -2.3 % -11.3 %

Product Performance

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

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

As previously disclosed, COVID-19 generated outsized growth in these two product categories in 2020 and the subsequent stabilization of the supply chain resulted in a reduction in orders and sales performance in 2021 that was well below what might normally be expected given the health of the industrial economy.

As a result, the change in our non-fastener lines in 2021 and 2020 did not provide as much insight into the trends of our traditional manufacturing and construction customers as is typically the case.

Still, we have sold non-fastener products through multiple cycles that do not include a pandemic and believe we can make several observations.

Generally speaking, our non-fastener business is not immune to the impact of industrial cycles.

However, we would typically expect it to outperform our fastener business in any cycle.

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

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

This reflects three things:

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

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

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

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

2020 -1.2 % -10.0 % -11.5 % -8.3 % -7.8 %

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

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

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

The gross profit percentage during each period was as follows:

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2021 45.4 % 46.5 % 46.3 % 46.5 % 46.2 %

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

The gross profit percentage for 2021 increased by 70 basis points based on higher product margins, primarily for safety products and overhead/organizational leverage related to higher volumes.

During 2021, our gross profit percentage increased when compared to the prior year.

This was largely due to three factors.

(1) We were able to leverage overhead/organizational expenses, absorbing certain fixed and period costs related to cyclical strength in our traditional manufacturing and construction markets.

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

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

approximately 25% of total safety product sales in 2019.

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

In 2021, we experienced higher demand for non-COVID-related products as the industrial economy improved and lower demand for COVID-related products as the supply chain steadied.

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

(3) Our net rebates were favorable in 2021.

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

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

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

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

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

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

This decrease was primarily related to three factors.

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

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

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

Operating and Administrative Expenses

Our operating and administrative expenses, as a percentage of net sales, increased by approximately 70 basis points to 26.0% in 2021 from 25.3% in 2020.

Employee-related expenses, as a percentage of net sales, increased by approximately 80 basis points.

Occupancy-related expenses, as a percentage of net sales, decreased by approximately 10 basis points.

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

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

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

Employee-related expenses 70% 11.6 % -2.0 %

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

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

The 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 Twelve-month Period

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

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

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This was related to:

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

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

an increase in our profit sharing contribution;

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

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

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

and an increase in our profit sharing contribution.

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

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

Twelve-month Period

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

Non-in-market selling (1)

Selling subtotal 1.7 % -6.2 %

Distribution/Transportation 5.8 % -10.5 %

Manufacturing 2.0 % -9.9 %

Selling personnel (1)

Distribution/Transportation personnel 8.4 % 5.8 %

Manufacturing personnel 12.4 % 2.0 %

Organizational support personnel (2)

Non-selling subtotal 5.8 % -5.2 %

Total 2.8 % -6.0 %

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

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

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

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

Total personnel 8.3 % 2.8 %

Of our 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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This was related to:

the timing of development costs related to equipment utilized as part of our FMI suite of technologies;

depreciation related to a higher installed base of FMI devices;

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

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

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

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

Combined, all other operating and administrative expenses increased in 2022 from 2021.

This was related to:

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

higher spending on information technology;

higher spending on travel, meals, and supplies as business activity recovered from the COVID-related travel restrictions of 2020;

and higher costs for legal settlements.

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

higher spending on travel, meals, and supplies;

and higher general insurance expense.

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

Net Interest Expense

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

This was related to:

lower interest income, as the special dividend paid in December 2020 resulted in lower interest-earning cash balances in 2021;

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

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

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

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

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

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

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

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Tax Rate 24.5 % 23.4 %

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

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

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

Liquidity and Capital Resources

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% of net earnings 86.6 % 83.3 %

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

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

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

Trade Working Capital Assets

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

Twelve-month Dollar Change Twelve-month Percentage Change

Dollar Change Twelve-month

Percentage Change

2022 2022 2022

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

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

Net sales in last three months $ 1,695.6 969.8 16.1 %

Note – Amounts may not foot due to rounding difference.

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

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

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

One reason for this is cyclical.

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

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

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

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

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

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

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% of net earnings 15.0 % 16.1 %

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

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

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

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% of net earnings 14.9 % 16.0 %

Our net capital expenditures decreased in 2021, when compared to 2020.

We had higher spending on an office building construction project in Winona, Minnesota intended to support growth in our business.

This was more than offset by reduced spending in other areas.

We saw a significant decline in spending on FMI equipment due to slower hardware signings, lower vending equipment costs following the March 2020 acquisition of certain industrial vending assets of Apex, and an increase in the refurbishment and redeployment of FMI hardware as an alternative to buying new devices.

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

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

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

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

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

Net Cash Used in Financing Activities

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

Net cash used $ 627.1 754.4

% of net earnings 67.8 % 87.8 %

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

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

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

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

Cash dividends paid $ 711.3 643.7

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% of net earnings -0.8 % -3.4 %

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

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

% of net earnings -15.2 % 1.6 %

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Stock Purchases

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

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

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

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

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

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

This authorization did not have an expiration date.

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

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

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

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

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Effects of Inflation

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

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

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

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

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

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

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

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

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

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

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

Critical Accounting Estimates

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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-K

Item 7. Management’s Discussion and Analysis