FASTENAL CO 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Fastenal Company: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Fastenal Company and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of earnings, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes and financial statement schedule II — valuation and qualifying accounts (collectively, the consolidated financial statements). We also have audited the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. 51 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Sufficiency of audit evidence over inventory quantities at in-market locations As disclosed in the consolidated balance sheet, the Company held $1,522.7 million of inventory, the majority of which was held at 3,419 in-market locations, as of December 31, 2023. The Company's processes to track and determine consolidated inventory relies on a perpetual inventory system which involves the interaction of information technology (IT) systems. We identified the evaluation of the sufficiency of audit evidence obtained related to the quantities of inventory at in-market locations as a critical audit matter. Evaluating the sufficiency of audit evidence over quantities of inventory at in-market locations required challenging auditor judgment to assess the number of in-market locations visited and included the involvement of IT professionals with specialized skills and knowledge due to the interaction of IT systems that track physical inventory quantities by location. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This included IT application controls, as well as certain controls related to access to programs and data, program changes, and computer operations. It also included certain controls related to the Company's physical inventory cycle counts. We involved IT professionals with specialized skills and knowledge, who assisted in testing certain IT controls, inclusive of the interface of IT systems, which support the Company's perpetual inventory system. We applied auditor judgment in the determination of the locations to test the Company's inventory quantities by evaluating: • Homogeneity of the locations; • Historical inventory locations we have visited and results of prior physical counts; • Inventory dollars by location; and • The Company's inventory cycle count results, including the results of monitoring and compliance with cycle count program by in-market location. We tested the existence and completeness of inventory by counting inventory quantities on a sample basis through in-market location visits during the year to evaluate the Company's perpetual inventory records. In addition, we evaluated the overall sufficiency of audit evidence obtained over the quantities of inventory at in-market locations. /s/ KPMG LLP We have served as the Company's auditor since 1987. Minneapolis, Minnesota February 6, 2024 52 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Consolidated Balance Sheets (Amounts in millions except share information) December 31 2023 2022 Assets Current assets: Cash and cash equivalents $ 221.3 230.1 Trade accounts receivable, net of allowance for credit losses of $ 6.4 and $ 8.3 , respectively 1,087.6 1,013.2 Inventories 1,522.7 1,708.0 Prepaid income taxes 17.5 8.1 Other current assets 171.8 165.4 Total current assets 3,020.9 3,124.8 Property and equipment, net 1,011.1 1,010.0 Operating lease right-of-use assets 270.2 243.0 Other assets 160.7 170.8 Total assets $ 4,462.9 4,548.6 Liabilities and Stockholders' Equity Current liabilities: Current portion of debt $ 60.0 201.8 Accounts payable 264.1 255.0 Accrued expenses 241.0 241.1 Current portion of operating lease liabilities 96.2 91.9 Total current liabilities 661.3 789.8 Long-term debt 200.0 353.2 Operating lease liabilities 178.8 155.2 Deferred income taxes 73.0 83.7 Other long-term liabilities 1.0 3.5 Commitments and contingencies (Notes 5, 8, 9, and 10) Stockholders' equity: Preferred stock: $ 0.01 par value, 5,000,000 shares authorized, no shares issued or outstanding — — Common stock: $ 0.01 par value, 800,000,000 shares authorized, 571,982,367 and 570,811,674 shares issued and outstanding, respectively 5.7 5.7 Additional paid-in capital 41.0 3.6 Retained earnings 3,356.9 3,218.7 Accumulated other comprehensive loss ( 54.8 ) ( 64.8 ) Total stockholders' equity 3,348.8 3,163.2 Total liabilities and stockholders' equity $ 4,462.9 4,548.6 See accompanying Notes to Consolidated Financial Statements. 53 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Consolidated Statements of Earnings (Amounts in millions except earnings per share) For the year ended December 31 2023 2022 2021 Net sales $ 7,346.7 6,980.6 6,010.9 Cost of sales 3,992.2 3,764.8 3,233.7 Gross profit 3,354.5 3,215.8 2,777.2 Operating and administrative expenses 1,825.8 1,762.2 1,559.8 Operating income 1,528.7 1,453.6 1,217.4 Interest income 4.1 0.7 0.1 Interest expense ( 10.8 ) ( 14.3 ) ( 9.7 ) Earnings before income taxes 1,522.0 1,440.0 1,207.8 Income tax expense 367.0 353.1 282.8 Net earnings $ 1,155.0 1,086.9 925.0 Basic net earnings per share $ 2.02 1.89 1.61 Diluted net earnings per share $ 2.02 1.89 1.60 Basic weighted average shares outstanding 571.3 573.8 574.8 Diluted weighted average shares outstanding 573.0 575.6 577.1 See accompanying Notes to Consolidated Financial Statements. 54 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Amounts in millions) For the year ended December 31 2023 2022 2021 Net earnings $ 1,155.0 1,086.9 925.0 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (net of tax of $ 0.0 in 2023, 2022, and 2021) 10.0 ( 34.1 ) ( 9.5 ) Comprehensive income $ 1,165.0 1,052.8 915.5 See accompanying Notes to Consolidated Financial Statements. 55 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Amounts in millions except per share information) 2023 2022 2021 Common stock Balance at beginning of year $ 5.7 5.8 5.7 Stock options exercised 0.0 ( 0.1 ) 0.1 Balance at end of year 5.7 5.7 5.8 Additional paid-in capital Balance at beginning of year 3.6 96.2 59.1 Stock options exercised 30.1 9.3 31.5 Purchases of common stock — ( 109.1 ) — Stock-based compensation 7.3 7.2 5.6 Balance at end of year 41.0 3.6 96.2 Retained earnings Balance at beginning of year 3,218.7 2,970.9 2,689.6 Net earnings 1,155.0 1,086.9 925.0 Cash dividends paid ( 1,016.8 ) ( 711.3 ) ( 643.7 ) Translation adjustment upon merger of foreign subsidiary — 0.9 — Purchases of common stock — ( 128.7 ) — Balance at end of year 3,356.9 3,218.7 2,970.9 Accumulated other comprehensive income (loss) Balance at beginning of year ( 64.8 ) ( 30.7 ) ( 21.2 ) Other comprehensive income (loss) 10.0 ( 34.1 ) ( 9.5 ) Balance at end of year ( 54.8 ) ( 64.8 ) ( 30.7 ) Total stockholders' equity $ 3,348.8 3,163.2 3,042.2 Cash dividends paid per share of common stock $ 1.78 1.24 1.12 See accompanying Notes to Consolidated Financial Statements. 56 Table of Contents FASTENAL COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows (Amounts in millions) For the year ended December 31 2023 2022 2021 Cash flows from operating activities: Net earnings $ 1,155.0 1,086.9 925.0 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of property and equipment 166.6 165.9 159.9 (Gain) loss on sale of property and equipment ( 4.3 ) 1.1 ( 1.1 ) Bad debt expense (recoveries) 2.2 ( 1.8 ) 2.5 Deferred income taxes ( 10.7 ) ( 4.9 ) ( 13.7 ) Stock-based compensation 7.3 7.2 5.6 Amortization of intangible assets 10.7 10.7 10.8 Changes in operating assets and liabilities: Trade accounts receivable ( 72.3 ) ( 119.8 ) ( 135.2 ) Inventories 189.1 ( 198.0 ) ( 189.5 ) Other current assets ( 6.4 ) 22.7 ( 47.8 ) Accounts payable 8.4 21.9 26.1 Accrued expenses ( 0.6 ) ( 57.2 ) 26.2 Income taxes ( 9.4 ) 0.4 ( 1.8 ) Other ( 2.9 ) 5.9 3.1 Net cash provided by operating activities 1,432.7 941.0 770.1 Cash flows from investing activities: Purchases of property and equipment ( 172.8 ) ( 173.8 ) ( 156.6 ) Proceeds from sale of property and equipment 12.2 11.4 8.4 Other ( 0.6 ) ( 0.6 ) ( 0.3 ) Net cash used in investing activities ( 161.2 ) ( 163.0 ) ( 148.5 ) Cash flows from financing activities: Proceeds from debt obligations 880.0 1,795.0 525.0 Payments against debt obligations ( 1,175.0 ) ( 1,630.0 ) ( 540.0 ) Proceeds from exercise of stock options 30.1 9.2 31.6 Purchases of common stock — ( 237.8 ) — Cash dividends paid ( 1,016.8 ) ( 711.3 ) ( 643.7 ) Net cash used in financing activities ( 1,281.7 ) ( 774.9 ) ( 627.1 ) Effect of exchange rate changes on cash and cash equivalents 1.4 ( 9.2 ) ( 4.0 ) Net decrease in cash and cash equivalents ( 8.8 ) ( 6.1 ) ( 9.5 ) Cash and cash equivalents at beginning of year 230.1 236.2 245.7 Cash and cash equivalents at end of year $ 221.3 230.1 236.2 Supplemental information: Cash paid for interest $ 12.2 13.3 9.9 Net cash paid for income taxes $ 383.0 354.1 294.0 See accompanying Notes to Consolidated Financial Statements. 57 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements Note 1. Business Overview and Summary of Significant Accounting Policies Business Overview Fastenal is a leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of branches and Onsite locations. Collectively, we refer to our branches and Onsite locations as in-market locations. We have more than 3,400 in-market locations located primarily in North America. Principles of Consolidation The consolidated financial statements include the accounts of Fastenal Company and its subsidiaries (collectively, referred to as Fastenal or by terms such as we, our, or us). All material intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition Net sales include products and shipping and handling charges, net of estimates for product returns and any related sales incentives. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when or as we satisfy our performance obligations under the contract. We recognize revenue by transferring control of the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. We estimate product returns based on historical return rates. Using probability assessments, which are based on known inputs at year-end, we estimate sales incentives expected to be paid over the term of the contract. The majority of our contracts have a single performance obligation and are short term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Accounts Receivable Credit is extended based upon an evaluation of the customer's financial condition. Accounts receivable are stated at their estimated net realizable value. The allowance for credit losses is based on an income statement approach which adjusts the ending balance sheet to take into consideration expected losses over the contractual lives of the receivables, considering factors such as historical data as a basis for future expected losses. Foreign Currency Translation and Transactions The functional currency of our foreign operations is typically the applicable local currency. The functional currency is translated into United States dollars for balance sheet accounts, except retained earnings, using current exchange rates as of the balance sheet date, for retained earnings at historical exchange rates, and for revenue and expense accounts using a weighted average exchange rate during the applicable period. The translation adjustments are deferred as a separate component of stockholders' equity captioned accumulated other comprehensive income (loss). Gains or losses resulting from transactions denominated in foreign currencies are included in cost of sales or operating and administrative expenses. Cash and Cash Equivalents We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Inventories Inventories, consisting of finished goods merchandise held for resale, are stated at the lower of cost (first in, first out method) or net realizable value. We record valuation adjustments for excess, slow-moving, and obsolete inventory that are equal to the difference between the cost and estimated net realizable value for that inventory. These estimates are based on a review and comparison of the current inventory levels to projected and historical sales of inventory. Property and Equipment Property and equipment are stated at cost. Depreciation on property and equipment is provided for using the straight-line method over the anticipated economic useful lives of the related property. Leases We determine if an arrangement contains a lease at inception. Operating leases are included in our operating lease right-of-use (ROU) assets, the current portion of operating lease liabilities, and the operating lease liabilities in our Consolidated Balance Sheets. 58 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements (Continued) The ROU assets represent our right to control the use of an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The operating lease ROU assets also include any prepaid lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the lease term. Many of our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs) which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases. Our pick-up truck leases typically have a non-cancelable lease term of less than one year and therefore, we have elected the practical expedient to exclude these short-term leases from our ROU assets and lease liabilities. Most leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate. Long-Lived Assets Long-lived assets consist of net property and equipment, operating lease right-of-use assets, prepaid deposits, goodwill, and definite-lived intangible assets, and are reviewed for impairment whenever an event or change in circumstance indicates that the carrying amount of the asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by the asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as necessary. There were no impairments recorded during any of the three years reported in these consolidated financial statements. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is reviewed for impairment annually. The identifiable intangible assets are amortized on a straight-line basis over their estimated life. Accounting Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent liabilities. Actual results could differ from those estimates. Insurance Reserves We are self-insured for certain losses relating to workers' compensation, automobile, health, and general liability costs. Specific stop-loss coverage is provided for catastrophic claims in order to limit exposure to significant claims. Self-insurance liabilities are based on our estimate of reported claims and claims incurred but not yet reported. Product Warranties We offer a basic limited warranty for certain of our products. The specific terms and conditions of those warranties vary depending upon the product sold. We typically recoup these costs through product warranties we hold with the original equipment manufacturers. Our warranty expense has historically been minimal. Stock-Based Compensation We estimate the fair value of stock options as of the date of the grant using a Black-Scholes valuation model. Stock-based compensation expense equal to the grant date fair value is recognized on a straight-line basis over the vesting period. Our stock-based compensation expense is recorded in operating and administrative expenses. 59 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements (Continued) Income Taxes We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense. Earnings Per Share Basic net earnings per share is calculated using net earnings available to common stockholders divided by the weighted average number of shares of common stock outstanding during the year. Diluted net earnings per share is similar to basic net earnings per share except that the weighted average number of shares of common stock outstanding includes the incremental shares assumed to be issued upon the exercise of stock options considered to be 'in-the-money' (i.e., when the market price of our stock is greater than the exercise price of our outstanding stock options). Segment Reporting We have determined that for our North American regions we meet the aggregation criteria outlined in the accounting standards as these regions have similar: (1) economic characteristics, (2) products and services, (3) customers, (4) distribution channels, and (5) regulatory environments. Considering our operations outside of North America represent less than 10% of our net sales, net earnings, or assets, we report as a single business segment. Recently Issued Accounting Pronouncements In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which enhances reporting requirements under Topic 280. The enhanced disclosure requirements include: title and position of the Chief Operating Decision Maker (CODM), significant segment expenses provided to the CODM, extending certain annual disclosures to interim periods, clarifying single reportable segment entities must apply ASC 280 in its entirety, and permitting more than one measure of segment profit or loss to be reported under certain circumstances. This change is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. This change will apply retrospectively to all periods presented. In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740) , which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. The new guidance requires consistent categorization and greater disaggregation of information in the rate reconciliation, as well as further disaggregation of income taxes paid. This change is effective for annual periods beginning after December 15, 2024. This change will apply on a prospective basis to annual financial statements for periods beginning after the effective date. However, retrospective application in all prior periods presented is permitted. 60 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements (Continued) Note 2. Revenue Disaggregation of Revenue The accounting policies of the operations in the various geographic areas are the same as those described in the summary of significant accounting policies. Revenues are attributed to countries based on the selling location from which the sale occurred. During 2023, 2022, and 2021, no single customer represented 5% or more of our consolidated net sales. Our revenues related to the following geographic areas were as follows for the periods ended December 31: Twelve-month Period 2023 2022 2021 United States $ 6,139.8 5,867.1 5,033.3 % of revenues 83.6 % 84.0 % 83.7 % Canada and Mexico 981.9 884.4 749.0 % of revenues 13.4 % 12.7 % 12.5 % North America 7,121.7 6,751.5 5,782.3 % of revenues 97.0 % 96.7 % 96.2 % All other foreign countries 225.0 229.1 228.6 % of revenues 3.0 % 3.3 % 3.8 % Total revenues $ 7,346.7 6,980.6 6,010.9 The percentages of our sales by end market were as follows for the periods ended December 31: Twelve-month Period 2023 2022 2021 Manufacturing 74.3 % 72.2 % 68.9 % Non-residential construction 9.1 % 10.3 % 11.1 % Other 16.6 % 17.5 % 20.0 % 100.0 % 100.0 % 100.0 % The percentages of our sales by product line were as follows for the periods ended December 31: Twelve-month Period Type Introduced 2023 2022 2021 Fasteners (1) 1967 32.4 % 34.0 % 33.3 % Tools 1993 8.5 % 8.4 % 8.5 % Cutting tools 1996 5.3 % 5.0 % 5.0 % Hydraulics & pneumatics 1996 6.7 % 6.5 % 6.4 % Material handling 1996 5.6 % 5.7 % 5.6 % Janitorial supplies 1996 8.4 % 8.0 % 8.2 % Electrical supplies 1997 4.6 % 4.4 % 4.3 % Welding supplies 1997 4.1 % 3.9 % 3.8 % Safety supplies 1999 21.2 % 20.8 % 21.2 % Other 3.2 % 3.3 % 3.7 % 100.0 % 100.0 % 100.0 % (1) The fastener product line represents fasteners and miscellaneous supplies. 61 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements (Continued) Note 3. Long-Lived Assets The accounting policies of the operations in the various geographic areas are the same as those described in the summary of significant accounting policies . Long-lived assets consist of net property and equipment, operating lease right-of-use assets, prepaid deposits, goodwill, and definite-lived intangible assets. Property and equipment at year end consisted of the following: Depreciable Life in Years 2023 2022 Land — $ 67.2 67.5 Buildings and improvements 15 to 40 525.1 509.2 Automated distribution and warehouse equipment 5 to 30 271.7 269.2 Shelving, industrial vending, and equipment 3 to 10 1,366.5 1,283.8 Transportation equipment 3 to 5 98.3 85.7 Construction in progress — 107.8 96.0 2,436.6 2,311.4 Less accumulated depreciation ( 1,425.5 ) ( 1,301.4 ) Property and equipment, net $ 1,011.1 1,010.0 Our long-lived assets related to the following geographic areas at year end: 2023 2022 United States $ 1,314.2 1,303.4 Canada and Mexico 87.2 80.4 North America 1,401.4 1,383.8 All other foreign countries 40.6 40.0 Total long-lived assets $ 1,442.0 1,423.8 Note 4. Accrued Expenses Accrued expenses at year end consisted of the following: 2023 2022 Employee payroll and related taxes $ 15.2 12.8 Employee bonuses and commissions 32.3 32.7 Profit sharing contribution 23.1 22.1 Insurance reserves 40.1 40.4 Indirect taxes 36.1 40.3 Customer promotions and marketing 63.3 60.6 Other 30.9 32.2 Accrued expenses $ 241.0 241.1 62 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements (Continued) Note 5. Stockholders' Equity Dividends On January 17, 2024, our board of directors declared a quarterly dividend of $ 0.39 per share of common stock to be paid in cash on February 29, 2024 to shareholders of record at the close of business on February 1, 2024. In 2023, we paid aggregate annual cash dividends per share of $ 1.78 , which included a special, one-time dividend of $ 0.38 per share. We paid aggregate annual cash dividends per share of $ 1.24 and $ 1.12 in 2022 and 2021, respectively. Stock Options Effective January 2, 2024, the compensation committee of our board of directors granted to our employees options to purchase a total of 764,195 shares of our common stock at an exercise price of $ 64.00 per share. On the same date, certain of our non-employee directors received options to acquire a total of 50,717 shares of our common stock at an exercise price of $ 64.00 per share. The closing stock price on the effective date of the grants was $ 63.55 per share. The following tables summarize the details of options granted under our stock option plans that were still outstanding as of December 31, 2023, and the assumptions used to value those grants. All such grants were effective at the close of business on the date of grant. Options Granted Option Exercise Price Closing Stock Price on Date of Grant December 31, 2023 Date of Grant Options Outstanding Options Exercisable January 3, 2023 1,071,943 $ 48.00 $ 47.400 989,048 70,562 January 3, 2022 713,438 $ 62.00 $ 61.980 611,848 53,355 January 4, 2021 741,510 $ 48.00 $ 47.650 591,206 211,323 January 2, 2020 902,263 $ 38.00 $ 37.230 658,884 322,242 January 2, 2019 1,316,924 $ 26.00 $ 25.705 758,611 451,061 January 2, 2018 1,087,936 $ 27.50 $ 27.270 541,026 419,460 January 3, 2017 1,529,578 $ 23.50 $ 23.475 523,828 426,290 April 19, 2016 1,690,880 $ 23.00 $ 22.870 245,075 188,177 April 21, 2015 1,786,440 $ 21.00 $ 20.630 54,552 54,552 Total 10,840,912 4,974,078 2,197,022 Date of Grant Risk-free Interest Rate Expected Life of Option in Years Expected Dividend Yield Expected Stock Volatility Estimated Fair Value of Stock Option January 3, 2023 4.0 % 5.00 2.6 % 29.58 % $ 11.62 January 3, 2022 1.3 % 5.00 1.7 % 28.52 % $ 13.68 January 4, 2021 0.4 % 5.00 2.0 % 29.17 % $ 9.57 January 2, 2020 1.7 % 5.00 2.4 % 25.70 % $ 6.81 January 2, 2019 2.5 % 5.00 2.9 % 23.96 % $ 4.40 January 2, 2018 2.2 % 5.00 2.3 % 23.45 % $ 5.02 January 3, 2017 1.9 % 5.00 2.6 % 24.49 % $ 4.20 April 19, 2016 1.3 % 5.00 2.6 % 26.34 % $ 4.09 April 21, 2015 1.3 % 5.00 2.7 % 26.84 % $ 3.68 All of the options in the tables above vest and become exercisable over a period of up to eight years . Generally, each option will terminate approximat ely 10 years after the grant date. The fair value of each share-based option is estimated on the date of grant using a Black-Scholes valuation method that uses the assumptions listed above. The risk-free interest rate is based on the U.S. Treasury rate over the expected life of the option at the time of grant. The expected life is the average length of time over which we expect the employee groups will exercise their options, net of forfeitures, which is based on historical experience with similar grants. The dividend yield is estimated over the expected life of the option based on our current dividend payout, historical dividends paid, and expected future cash dividends. Expected stock volatilities are based on the movement of our stock price over the most recent historical period equivalent to the expected life of the option. 63 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements (Continued) A summary of activities under our stock option plans consisted of the following: Options Outstanding Exercise Price (1) Remaining Life (2) Outstanding as of January 1, 2023 5,374,736 $ 34.37 5.66 Granted 1,071,943 $ 48.00 9.00 Exercised ( 1,170,693 ) $ 25.69 Cancelled/forfeited ( 301,908 ) $ 45.00 Outstanding as of December 31, 2023 4,974,078 $ 38.70 5.99 Exercisable as of December 31, 2023 2,197,022 $ 30.88 4.54 Options Outstanding Exercise Price (1) Remaining Life (2) Outstanding as of January 1, 2022 5,173,270 $ 30.23 6.08 Granted 713,438 $ 62.00 9.00 Exercised ( 346,992 ) $ 26.78 Cancelled/forfeited ( 164,980 ) $ 40.00 Outstanding as of December 31, 2022 5,374,736 $ 34.37 5.66 Exercisable as of December 31, 2022 2,437,636 $ 27.14 4.30 (1) Weighted average exercise price. (2) Weighted average remaining contractual life in years. The total intrinsic value of stock options exercised during the years ended December 31, 2023, 2022, and 2021 was $ 38.1 , $ 10.2 , and $ 38.8 , respectively. The intrinsic value represents the difference between the exercise price and fair value of the underlying shares at the date of exercise. At December 31, 2023, there was $ 16.6 of total unrecognized stock-based compensation expense related to outstanding unvested stock options granted under the employee stock option plan. This expense is expected to be recognized over a weighted average period of 4.18 years. Any future change in estimated forfeitures will impact this amount. The total grant date fair value of stock options vested under our employee stock option plan during 2023, 2022, and 2021 was $ 5.3 , $ 5.2 , and $ 4.8 , respectively. Total stock-based compensation expense related to our employee stock option plan was $ 7.3 , $ 7.2 , and $ 5.6 for 2023, 2022, and 2021, respectively. Shares Outstanding Shares of common stock outstanding were as follows: 2023 2022 2021 Balance at beginning of year 570,811,674 575,464,682 574,159,575 Stock options exercised 1,170,693 346,992 1,305,107 Purchases of common stock — ( 5,000,000 ) — Balance at end of year 571,982,367 570,811,674 575,464,682 64 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements (Continued) Earnings Per Share The following tables present a reconciliation of the denominators used in the computation of basic and diluted earnings per share and a summary of the options to purchase shares of common stock which were excluded from the diluted earnings per share calculation because they were anti-dilutive: Reconciliation 2023 2022 2021 Basic weighted average shares outstanding 571,271,846 573,777,790 574,808,030 Weighted shares assumed upon exercise of stock options 1,736,762 1,845,324 2,309,026 Diluted weighted average shares outstanding 573,008,608 575,623,114 577,117,056 Summary of Anti-dilutive Options Excluded 2023 2022 2021 Options to purchase shares of common stock 1,568,460 1,335,898 678,310 Weighted average exercise prices of options $ 53.80 55.25 48.00 Any dilutive impact summarized above related to periods when the average market price of our stock exceeded the exercise price of the potentially dilutive stock options then outstanding. Note 6. Retirement Savings Plan The Fastenal Company and Subsidiaries 401(k) and Employee Stock Ownership Plan covers all of our employees in the United States. Our employees in Canada may participate in a Registered Retirement Savings Plan. The general purpose of both of these plans is to provide additional financial security during retirement by providing employees with an incentive to make regular savings contributions. In addition to the participation of our employees, we make annual profit sharing contributions based on an established formula. The expense recorded under this profit sharing formula was approximately $ 23.1 , $ 22.1 , and $ 17.4 for 2023, 2022, and 2021, respectively. Note 7. Income Taxes Earnings before income taxes were derived from the following sources: 2023 2022 2021 Domestic $ 1,392.7 1,335.7 1,100.3 Foreign 129.3 104.3 107.5 Earnings before income taxes $ 1,522.0 1,440.0 1,207.8 Components of income tax expense (benefit) were as follows: 2023 2022 2021 Current Deferred Total Current Deferred Total Current Deferred Total Federal $ 273.3 ( 9.2 ) 264.1 267.6 ( 5.0 ) 262.6 214.3 ( 11.4 ) 202.9 State 59.6 ( 1.3 ) 58.3 58.0 ( 1.1 ) 56.9 46.7 ( 1.7 ) 45.0 Foreign 44.9 ( 0.3 ) 44.6 35.0 ( 1.4 ) 33.6 34.1 0.8 34.9 Income tax expense $ 377.8 ( 10.8 ) 367.0 360.6 ( 7.5 ) 353.1 295.1 ( 12.3 ) 282.8 Income tax expense in the accompanying consolidated financial statements differed from the expected expense as follows: 2023 2022 2021 Amount Percent Amount Percent Amount Percent U.S. federal statutory income tax $ 319.6 21.0 % $ 302.4 21.0 % $ 253.6 21.0 % State income taxes, net of federal benefit $ 45.1 3.0 % $ 45.6 3.2 % $ 34.9 2.9 % Other, net $ 2.3 0.1 % $ 5.1 0.3 % $ ( 5.7 ) - 0.5 % Effective income tax rate $ 367.0 24.1 % $ 353.1 24.5 % $ 282.8 23.4 % 65 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements (Continued) The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at year end consisted of the following: 2023 2022 Deferred income tax assets: Inventory costing and valuation methods $ 5.6 6.7 Insurance reserves 8.3 8.6 Foreign net operating loss and credit carryforwards 3.0 2.6 Stock-based compensation 3.8 3.6 Operating lease liabilities 69.5 62.6 Section 174 capitalization 7.4 3.4 Other, deferred tax assets 9.4 9.6 Total deferred income tax assets 107.0 97.1 Less: Valuation allowances ( 2.2 ) ( 1.8 ) Total net deferred income tax assets 104.8 95.3 Property and equipment ( 95.4 ) ( 102.6 ) Operating lease ROU assets ( 68.3 ) ( 61.5 ) Prepaid expenses ( 3.5 ) ( 3.5 ) Other, deferred tax liabilities ( 0.4 ) ( 1.3 ) Total deferred income tax liabilities ( 167.6 ) ( 168.9 ) Net deferred income tax liabilities $ ( 62.8 ) ( 73.6 ) A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows: 2023 2022 Balance at beginning of year: $ 10.1 7.4 Increase related to prior year tax positions 5.6 3.5 Increase related to current year tax positions 0.6 0.6 Decrease related to statute of limitation lapses ( 6.1 ) ( 0.9 ) Settlements — ( 0.5 ) Balance at end of year: $ 10.2 10.1 Included in the liability for gross unrecognized tax benefits is $ 3.8 as of December 31, 2023 and $ 0.7 as of December 31, 2022 for interest and penalties, both of which we classify as a component of income tax expense. The amount of unrecognized tax benefits that would favorably impact the eff ective tax rate, if recognized, is $ 9.2 as of December 31, 2023 and $ 8.6 as of December 31, 2022. We believe it is reasonably possible that a decrease of up to $ 1.4 in unrecognized tax benefits may be recognized by the end of 2024 as a result of the lapse of the statute of limitations. The 2023 and 2022 liability is included in deferred income taxes in the Consolidated Balance Sheets. We file income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. We are no longer subject to income tax examinations by taxing authorities for taxable years before 2020 in the case of United States federal examinations, and with limited exception, before 2018 in the case of foreign, state, and local examinations. In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or very minimal. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of our approximately $ 514.7 of undistributed earnings from foreign subsidiaries to the U.S. as those earnings continue to be permanently reinvested. 66 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements (Continued) Note 8. Operating Leases We lease space under non-cancelable operating leases for several distribution centers, several manufacturing locations, and certain branch locations. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the leases do not contain contingent rent provisions. We also lease certain semi-tractors, pick-up trucks, and computer equipment under operating leases. Certain operating leases for pick-up trucks contain residual value guarantee provisions which would generally become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. The aggregate residual value guarantee related to these leases was ap proximately $ 118.4 . We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote. The cost components of our operating leases were as follows for the periods ended December 31: 2023 2022 2021 Leased Facilities and Equipment Leased Vehicles Total Leased Facilities and Equipment Leased Vehicles Total Leased Facilities and Equipment Leased Vehicles Total Operating lease cost $ 99.4 18.2 117.6 96.8 14.7 111.5 99.7 13.7 113.4 Variable lease cost 10.5 1.6 12.1 9.7 1.5 11.2 10.4 1.3 11.7 Short-term lease cost — 23.7 23.7 — 26.6 26.6 — 19.2 19.2 Total $ 109.9 43.5 153.4 106.5 42.8 149.3 110.1 34.2 144.3 Variable lease costs are excluded from ROU assets and lease liabilities and consist primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities and equipment which are paid based on actual costs incurred by the lessor as well as variable mileage costs related to our leased vehicles. Maturities of our lease liabilities for all operating leases were as follows as of December 31, 2023: Leased Facilities and Equipment Leased Vehicles Total 2024 $ 86.1 14.2 100.3 2025 65.1 12.1 77.2 2026 43.3 8.9 52.2 2027 26.5 5.1 31.6 2028 14.7 3.1 17.8 2029 and thereafter 13.0 1.5 14.5 Total lease payments $ 248.7 44.9 293.6 Less: Imputed interest ( 15.2 ) ( 3.4 ) ( 18.6 ) Present value of lease liabilities $ 233.5 41.5 275.0 The weighted average remaining lease terms and discount rates for all of our operating leases were as follows for the periods ended December 31: Remaining lease term and discount rate: 2023 2022 Weighted average remaining lease term (years) Leased facilities and equipment 3.76 3.57 Leased vehicles 3.77 2.66 Weighted average discount rate Lease facilities and equipment 3.07 % 2.07 % Leased vehicles 4.03 % 2.47 % 67 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements (Continued) Supplemental cash flow information related to our operating leases was as follows for the periods ended December 31: 2023 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflow from operating leases $ 115.7 110.9 112.4 Leased assets obtained in exchange for new operating lease liabilities 116.2 89.4 103.6 Note 9. Debt Commitments Credit Facility, Notes Payable, and Commitments Debt obligations and letters of credit outstanding at year end consisted of the following: Average Interest Rate at December 31, 2023 Debt Outstanding Maturity Date 2023 2022 Unsecured revolving credit facility 6.36 % September 28, 2027 $ — 225.0 Senior unsecured promissory notes payable, Series C 3.22 % March 1, 2024 60.0 60.0 Senior unsecured promissory notes payable, Series D 2.66 % May 15, 2025 75.0 75.0 Senior unsecured promissory notes payable, Series E 2.72 % May 15, 2027 50.0 50.0 Senior unsecured promissory notes payable, Series F 1.69 % June 24, 2023 — 70.0 Senior unsecured promissory notes payable, Series G 2.13 % June 24, 2026 25.0 25.0 Senior unsecured promissory notes payable, Series H 2.50 % June 24, 2030 50.0 50.0 Total 260.0 555.0 Less: Current portion of debt ( 60.0 ) ( 201.8 ) Long-term debt $ 200.0 353.2 Outstanding letters of credit under unsecured revolving credit facility - contingent obligation $ 32.7 36.3 Unsecured Revolving Credit Facility We have an $ 835.0 committed unsecured revolving credit facility (Credit Facility) with an uncommitted accordion option to increase the aggregate revolving commitment by an additional $ 365.0 for a total amount of $ 1,200.0 . The Credit Facility includes a committed letter of credit subfacility of $ 55.0 . Any borrowings outstanding under the Credit Facility for which we have the ability and intent to pay using cash within the next 12 months will be classified as a current liability. The Credit Facility contains certain financial and other covenants, and our right to borrow under the Credit Facility is conditioned upon, among other things, our compliance with these covenants. We are currently in compliance with these covenants. Borrowings under the Credit Facility generally bear interest at a rate per annum equal to Daily Simple SOFR plus a 0.10 % spread adjustment plus 0.95 %. We pay a commitment fee for the unused portion of the Credit Facility. This fee is either 0.10 % or 0.125 % per annum based on our usage of the Credit Facility. Senior Unsecured Promissory Notes Payable We have issued senior unsecured promissory notes under our master note agreement (the Master Note Agreement) in the aggregate principal amount of $ 260.0 as of December 31, 2023. Our aggregate borrowing capacity under the Master Note Agreement is $ 900.0 ; however, none of the institutional investors party to that agreement are committed to purchase notes thereunder. There is no amortization of these notes prior to their maturity date and interest is payable quarterly. The notes currently issued under our Master Note Agreement, including the maturity date and fixed interest rate per annum of each series of note, are contained in the table above. The Master Note Agreement contains certain financial and other covenants and we are currently in compliance with these covenants. 68 Table of Contents Fastenal Company and Subsidiaries Notes to Consolidated Financial Statements (Continued) Principal payments required on our outstanding indebtedness, based on the maturity dates defined within our long-term debt arrangements, for the succeeding five years, are displayed in the table below, as of December 31, 2023: Principal Payments 2024 $ 60.0 2025 75.0 2026 25.0 2027 50.0 2028 — 2029 and thereafter 50.0 Total $ 260.0 Note 10. Legal Contingencies We are involved in certain legal actions, including those that are ordinary routine litigation incidental to our business. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, that could require significant expenditures or result in lost revenues. We record a liability for these legal actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. As of December 31, 2023, there were no litigation matters that we consider to be probable or reasonably possible to have a material adverse outcome. Note 11. Subsequent Events We evaluated all subsequent event activity and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the Notes to Consolidated Financial Statements, with the exception of the dividend declaration and stock option activities disclosed in Note 5. ***End of Notes to Consolidated Financial Statements*** 69 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.