FASTENAL CO 10-Q

ITEM 2 — MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements and should be read in conjunction with the condensed consolidated financial statements. Dollar amounts are stated in millions except for share and per share amounts and where otherwise noted. Throughout this document, percentage and dollar change calculations, which are based on non-rounded dollar values, may not be able to be recalculated using the dollar values in this document due to the rounding of those dollar values. References to daily sales rate (DSR) change may reflect either growth (positive) or contraction (negative) for the applicable period. Business Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of more than 3,400 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. Our motto is Growth Through Customer Service ® and our tagline is Where Industry Meets Innovation ™ . We are a customer- and growth-centric organization focused on identifying unique technologies, capabilities, and supply chain solutions that get us closer to our customers and reduce the total cost of their global supply chain. We believe this close-to-the-customer, 'high-touch, high-tech' partnership approach is differentiated in the marketplace and allows us to gain market share in what remains a fragmented industrial distribution market. Executive Overview The following table presents a performance summary of our results of operations for the three-month periods ended March 31, 2024 and 2023 . Three-month Period 2024 2023 Change Net sales $ 1,895.1 1,859.1 1.9 % Business days 64 64 Daily sales $ 29.6 29.0 1.9 % Gross profit $ 861.6 850.0 1.4 % % of net sales 45.5 % 45.7 % Selling, general, and administrative expenses $ 471.4 456.8 3.2 % % of net sales 24.9 % 24.6 % Operating income $ 390.2 393.2 -0.8 % % of net sales 20.6 % 21.2 % Income before income taxes $ 389.8 389.7 0.0 % % of net sales 20.6 % 21.0 % Net income $ 297.7 295.1 0.9 % Diluted net income per share $ 0.52 0.52 0.6 % Note – Daily sales are defined as the total net sales for the period divided by the number of business days (in the United States) in the period. 12 Table of Contents The table below summarizes our absolute and full time equivalent (FTE; based on 40 hours per week) employee headcount, our investments related to in-market locations (defined as the sum of the total number of branch locations and the total number of active Onsite locations), and weighted Fastenal Managed Inventory (FMI) devices at the end of the periods presented and the percentage change compared to the end of the prior periods. Change Since: Change Since: Q1 2024 Q4 2023 Q4 2023 Q1 2023 Q1 2023 Selling personnel - absolute employee headcount 16,764 16,512 1.5 % 16,178 3.6 % Selling personnel - FTE employee headcount 15,102 15,070 0.2 % 14,704 2.7 % Total personnel - absolute employee headcount 23,695 23,201 2.1 % 22,820 3.8 % Total personnel - FTE employee headcount 20,935 20,721 1.0 % 20,262 3.3 % Number of branch locations 1,592 1,597 -0.3 % 1,660 -4.1 % Number of active Onsite locations 1,872 1,822 2.7 % 1,674 11.8 % Number of in-market locations 3,464 3,419 1.3 % 3,334 3.9 % Weighted FMI devices (MEU installed count) 115,653 113,138 2.2 % 104,673 10.5 % During the last twelve months, we increased our total FTE employee headcount by 673. This reflects an increase in our total FTE selling personnel of 398 to support growth in the marketplace and sales initiatives targeting customer acquisition. We had an increase in our distribution and transportation FTE personnel of 158 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 117 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. Three-month Period 2024 2023 Branch openings — 2 Branch closures, net of conversions (5) (25) Onsite activations 79 84 Onsite closures, net of conversions (29) (33) 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. This has reflected significant growth in Onsites and, to a lesser degree, international branches, which has more than overcome a meaningful decline in our traditional branch network from a strategic rationalization that aligned our physical footprint with changes in our business strategies. Branch closures may occur in the future to reflect normal churn in our business, but the strategic rationalization has concluded. As a result, we expect to see an increase in the rate of in-market location growth as Onsites continue to increase while our traditional branch network remains stable or grows moderately to sustain and improve our network and support our growth drivers. 13 Table of Contents FIRST QUARTER OF 2024 VERSUS FIRST QUARTER OF 2023 Results of Operations The following table sets forth condensed consolidated statements of income information (as a percentage of net sales) for the periods ended March 31: Three-month Period 2024 2023 Net sales 100.0 % 100.0 % Gross profit 45.5 % 45.7 % Selling, general, and administrative expenses 24.9 % 24.6 % Operating income 20.6 % 21.2 % Net interest expense 0.0 % -0.2 % Income before income taxes 20.6 % 21.0 % Note – Amounts may not foot due to rounding difference. Sales The table below sets forth net sales and daily sales for the periods ended March 31, and changes in such sales from the prior period to the more recent period: Three-month Period 2024 2023 Net sales $ 1,895.1 1,859.1 Percentage change 1.9 % 9.1 % Business days 64 64 Daily sales $ 29.6 29.0 Percentage change 1.9 % 9.1 % Daily sales impact of currency fluctuations 0.0 % -0.7 % Net sales increased $36.1, or 1.9%, in the first quarter of 2024 when compared to the first quarter of 2023. The effect of adverse weather in the first quarter of 2024 was a reduction in sales by 35 to 55 basis points as compared to a reduction in sales in the first quarter of 2023 by 20 to 40 basis points, resulting in a net negative impact from adverse weather in the first quarter of 2024 of 10 to 30 basis points. The effect of foreign exchange on sales was not material in the first quarter of 2024 as compared to negatively affecting sales in the first quarter of 2023 by approximately 70 basis points. We experienc ed higher unit sales in the first quarter of 2024 primarily due to growth with larger customers and Onsite locations opened in the last two years . The impact of product pricing was not material to net sales in the first quarter of 2024, as compared to the impact of product pricing on net sales in the first quarter of 2023 of 290 to 320 basis points. Incremental pricing actions over the past twelve months have been modest in scope, resulting in mostly stable price levels through the first quarter of 2024. 14 Table of Contents From a product standpoint, we have three categories: fasteners (including fasteners used in original equipment manufacturing (OEM) and maintenance, repair, and operations (MRO), safety supplies, and other product lines, the latter of which includes eight smaller product categories, such as tools, janitorial supplies, and cutting tools. We continued to experience a divergence in the performance of our fastener versus our non-fastener product lines in the first quarter of 2024, which we believe relates to three 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. Third, while the rate of outgrowth has slowed relative to what we experienced during the final two months of 2023, we continued to experience relatively faster growth with our retailer-oriented customers due to market share gains, product mix, and easier comparisons. This factor primarily benefited our safety product line. The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows: DSR Change Three-month Period % of Sales Three-month Period 2024 2023 2024 2023 OEM fasteners -4.0 % 12.6 % 19.6 % 20.8 % MRO fasteners -5.1 % -1.1 % 11.9 % 12.8 % Total fasteners -4.4 % 7.0 % 31.5 % 33.6 % Safety supplies 8.3 % 5.7 % 21.6 % 20.4 % Other product lines 3.9 % 12.4 % 46.9 % 46.0 % From an end market standpoint, we have five categories: heavy manufacturing, other manufacturing, non-residential construction, reseller, and other, the latter of which includes government/education and transportation/warehousing . We continued to experience a divergence in the performance of our manufacturing end market versus our non-manufacturing end markets in the first quarter of 2024, although the scale of that divergence has continued to narrow. These trends reflect a number of factors. First, we are growing relatively faster with key account customers with significant managed spend where our service model and technology is particularly impactful, which disproportionately benefits manufacturing customers. At the same time, this benefit has been increasingly offset by weakening end markets. Second, while our non-residential and reseller end markets remain relatively weak, they are beginning to come across easier comparisons in the preceding periods. Third, while the rate of outgrowth has slowed relative to what we experienced during the final two months of 2023, we continued to experience relatively faster growth with our retailer-oriented customers due to market share gains, product mix, and easier comparisons. This factor primarily benefited our other product lines. The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows: DSR Change Three-month Period % of Sales Three-month Period 2024 2023 2024 2023 Heavy manufacturing 2.7 % 17.6 % 43.4 % 43.1 % Other manufacturing 2.5 % 10.2 % 31.6 % 31.5 % Total manufacturing 2.6 % 14.4 % 75.0 % 74.6 % Non-residential construction -6.6 % -2.4 % 8.5 % 9.3 % Reseller -2.5 % -5.7 % 5.7 % 6.0 % Other end markets 7.7 % -3.6 % 10.8 % 10.1 % We report our customers in two categories: national accounts, which are customers with significant revenue potential and a national, multi-site contract, and non-national accounts, which include large regional customers, small local customers, and government custome rs. We continued to experience a significant divergence in the performance of our national account customers versus our non-national account customers, which relates to the relative growth of our sa les through Onsite locations and larger, key accounts. T he DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows: DSR Change Three-month Period % of Sales Three-month Period 2024 2023 2024 2023 National accounts 6.3 % 13.6 % 62.0 % 59.2 % Non-national accounts -4.5 % 3.4 % 38.0 % 40.8 % 15 Table of Contents Growth Drivers • We signed 102 new Onsite locations (defined as dedicated sales and service provided from within, or in proximity to, the customer's facility) in the first quarter of 2024. We had 1,872 active sites on March 31, 2024, which represented an increase of 11.8% from March 31, 2023. Daily sales through our Onsite locations, excluding sales transferred from branches to new Onsites, grew at a low single-digit rate in the first quarter of 2024 over the first quarter of 2023. This growth is due to contributions from Onsites activated and implemented in 2024 and 2023, as well as an increase in revenues per location among our more mature locations. These factors were only partly offset by Onsite closures. Our goal for Onsite signings in 2024 remains between 375 to 400. • FMI Technology is comprised of our FASTStock ℠ (scanned stocking locations), FASTBin ® (infrared, RFID, and scaled bins), and FASTVend ® (vending devices) offering. FASTStock's fulfillment processing technology is not embedded, is relatively less expensive and highly flexible in application, and delivered using our proprietary mobility technology. FASTBin and FASTVend incorporate highly efficient and powerful embedded data tracking and fulfillment processing technologies. The first statistic is a weighted FMI ® measure which combines the signings and installations of FASTBin and FASTVend in a standardized machine equivalent unit (MEU) based on the expected output of each type of device. We do not include FASTStock in this measurement because scanned stocking locations can take many forms, such as bins, shelves, cabinets, pallets, etc., that cannot be converted into a standardized MEU. The second statistic is sales through FMI Technology which combines the sales through FASTStock, FASTBin, and FASTVend. A portion of the growth in sales experienced by FMI, particularly FASTStock and FASTBin, reflects the migration of products from less efficient non-digital stocking locations to more efficient, digital stocking locations. The table below summarizes the signings and installations of, and sales through, our FMI devices. Three-month Period 2024 2023 Change Weighted FASTBin/FASTVend signings (MEUs) 6,726 5,902 14.0 % Signings per day 105 92 Weighted FASTBin/FASTVend installations (MEUs; end of period) 115,653 104,673 10.5 % FASTStock sales $ 239.8 236.7 1.3 % % of sales 12.5 % 12.6 % FASTBin/FASTVend sales $ 556.9 503.7 10.6 % % of sales 29.0 % 26.8 % FMI sales $ 796.7 740.4 7.6 % FMI daily sales $ 12.4 11.6 7.6 % % of sales 41.5 % 39.4 % Our goal for weighted FASTBin and FASTVend device signings in 2024 remains between 26,000 to 28,000 MEUs. • Our eCommerce business includes sales made through EDI, or other types of technical integrations, and through our web verticals. Daily sales through eCommerce grew 33.6% in the first quarter of 2024 and represented 28.6% of our total sales in the period. Our d igital products and services are comprised of sales through FMI (FASTStock, FASTBin, and FASTVend) plus that proportion of our eCommerce sales that do not represent billings of FMI services (collectively, our Digital Footprint). We believe the data that is created through our digital capabilities enhances product visibility, traceability, and control that reduces risk in operations and creates ordering and fulfillment efficiencies for both ourselves and our customers. As a result, we believe our opportunity to grow our business will be enhanced through the continued development and expansion of our digital capabilities. Our Digital Footprint in the first quarter of 2024 represented 59.2% of our sales, an increase from 54.1% of sales in the first quarter of 2023. 16 Table of Contents Gross Profit Our gross prof it, as a percentage of net sales, decreased to 45.5% in the first qu arter of 2024 from 45.7% in the fi rst quarter of 2023. Our gross profit percentage was negatively affected by customer and product mix. This reflects relatively stronger growth from large customers, including Onsite customers, and non-fastener products, each of which tend to have a lower gross profit percentage than our business as a who le. The negative impact of mix was partly offset by a couple of trends. First, we continue to experience modestly positive price-cost, reflecting easing product cost, the absence of meaningful pricing actions by us in the period, and an easy comparison versus the price-cost deficit experienced in the first quarter of 2023. Second, we had favorable leverage of organizational/overhead costs, primarily due to greater utilization of domestic transportation resources as we move more product to support current stocking levels. SG&A Expenses Our SG&A expenses, as a percentage of net sales, increased to 24.9% in the first quarter of 2024 from 24.6% in the first quarter of 2023. We continue to focus on limiting growth in our headcount and improving the balance of full-time and part-time employees in our workforce. We still deleveraged our employee-related expenses as a result of slower growth in sales in the first quarter of 2024. Th e percentage change in employee- related, occupancy-related, and all other SG&A expenses compared to the same periods in the preceding year, is outlined in the table below. Approximate Percentage of Total SG&A Expenses Three-month Period 2024 Employee-related expenses 70% to 75% 3.9 % Occupancy-related expenses 15% to 20% 0.0 % All other SG&A expenses 10% to 15% 3.5 % Employee-related expenses include: (1) payroll (which includes cash compensation, stock option expense, and profit sharing), (2) health care, (3) personnel development, and (4) social taxes. In the first quarter of 2024, our employee-relate d expenses increased when com pared to the first quarter of 2023. We experienced an increase in employee base pay due to higher average FTE and higher average wages during the period, as well as an increase in employee health care costs. This was only partly offset by lower bonus and commission payments reflecting slower sales and profit growth versus the first quarter of 2023. The table below summarizes our FTE headcount at the end of the periods presented and the percentage change compared to the end of the prior periods: Change Since: Change Since: Q1 2024 Q4 2023 Q4 2023 Q1 2023 Q1 2023 Selling personnel (1) 15,102 15,070 0.2 % 14,704 2.7 % Distribution/Transportation personnel 3,187 3,095 3.0 % 3,029 5.2 % Manufacturing personnel 715 697 2.6 % 714 0.1 % Organizational support personnel (2) 1,931 1,859 3.9 % 1,815 6.4 % Total personnel 20,935 20,721 1.0 % 20,262 3.3 % (1) Of our Selling Personnel, 80%-85% are attached to a specific in-market location. (2) Organizational support personnel consists of: (1) Sales & Growth Driver Support personnel (35% to 40% of category), which includes sourcing, purchasing, supply chain, product development, etc.; (2) Information Technology personnel (35% to 40% of category); and (3) Administrative Support personnel (20% to 25% of category), which includes human resources, Fastenal School of Business, accounting and finance, senior management, etc. 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 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). In the first quarter of 2024, our occupancy-related expenses were flat when compared to the first quarter of 2023. We had lower depreciation expense as we have had a large number of vending machines and certain of our hub automation equipment reach the end of their depreciable lives relative to the first quarter of 2023. This was offset by slightly higher facility expense. 17 Table of Contents All other SG&A expenses include: (1) selling-related transportation, (2) information technology (IT) expenses, (3) general corporate expenses, which consists of legal expenses, general insurance expenses, travel and marketing expenses, etc., and (4) sales of property and equipment. Combined, all other SG&A expenses increased in the first quarter of 2024 when compared to the first quarter of 2023. The increase in other SG&A expenses is primarily a result of modest increases in spending on information technology and higher lease costs in our selling-related vehicle fleet due to an increase in the mix of larger truck types and higher prices on newer vehicles. Operating Income Our operating income, as a percentage of net sales, decreased to 20.6% in the first quarter of 2024 from 21.2% in the first quarter of 2023. Net Interest We had net interest expense of $0.4 in the first quarter of 2024, compared to net interest expense of $3.5 in the fi rst quarter of 2023. We had higher interest income, reflecting higher average cash balances through the period, particularly in January and February, and higher rates earned on those balances. We had lower interest expense, reflecting lower average borrowings through the period. Income Taxes We recorded income tax expense of $92.1 in the first quarter of 2024, or 23.6% of income before income taxes. Income tax expense was $94.6 in the first quarter of 2023, or 24.3% of income before income taxes. We believe our ongoing tax rate, absent any discrete tax items or broader changes to tax law, will be approximately 24.5%. Our tax rate in the first quarter of 2024 was below our expected ongoing tax rate due to the tax benefits associated with the exercise of stock options during the quarter. Net Income Our net income during the first quarter of 2024 was $297.7, an increase of 0.9% compared to the first quarter of 2023. Our diluted net income per share was $0.52 during the first quarter of 2024, which was unchanged from $0.52 during the first quarter of 2023. Liquidity and Capital Resources Cash flow activity was as follows for the periods ended March 31: Three-month Period 2024 2023 Change Net cash provided by operating activities $ 335.6 388.5 -13.6 % Percentage of net income 112.7 % 131.7 % Net cash used in investing activities $ 48.4 31.0 56.1 % Percentage of net income 16.3 % 10.5 % Net cash used in financing activities $ 267.4 348.9 -23.4 % Net Cash Provided by Operating Activities Net cash provided by operating activities decreased $52.9 in the first quarter of 2024 when compared to the first quarter of 2023. The decrease in operating cash flow, as a percent of net income, reflects our operating assets and liabilities being a modest use of cash in the first quarter of 2024 versus a source of cash in the first quarter of 2023. Inventory was a smaller source of cash in the first quarter of 2024 relative to the preceding period as the pace of inventory reduction slowed as the proc ess of rightsizing stocking levels to reflect smoother supply chains is substantially complete. We also had relatively less favorable accruals for wages, reflecting the softer growth and earnings environment. Our rate of conversion of net income into operating cash flow in the first quarter of 2024 is broadly consistent with what we have achieved on average in the first quarter over the last five years. 18 Table of Contents The dollar and percentage change in accounts receivable, net, inventories, and accounts payable as of March 31, 2024 when compared to March 31, 2023 were as follows: March 31 Twelve-month Dollar Change Twelve-month Percentage Change 2024 2023 2024 2024 Accounts receivable, net $ 1,213.2 1,149.8 $ 63.4 5.5 % Inventories 1,496.3 1,651.9 (155.6) -9.4 % Trade working capital $ 2,709.5 2,801.7 $ (92.2) -3.3 % Accounts payable $ 276.0 266.8 $ 9.2 3.4 % Trade working capital, net $ 2,433.5 2,534.9 $ (101.4) -4.0 % Net sales in last three months $ 1,895.1 1,859.1 $ 36.1 1.9 % Note - Amounts may not foot due to rounding difference. The increase in our accounts receivable balance in the first quarter of 2024 was primarily attributable to two factors. First, our receivables increased as a result of growth in sales to our customers. Second, we continue to experience a shift in our mix due to relatively stronger growth from national account customers, which tend to carry longer payment terms than our non-national account customers. The decrease in our inventory balance in the first quarter of 2024 primarily reflects progress made over the last twelve months to reduce inventory following the normalization of the supply chain after the disruptions experienced in 2022. We responded to that event by deepening inventory to support customer growth, and the process of rightsizing our stock can be protracted given the quantity of imported product we source. We have also experienced modest deflation in our inventory. The increase in our accounts payable balance in the first quarter of 2024 was primarily attributable to our product purchases increasing to support the growth in our business. The growth in our accounts payable balance is above the growth in our sales reflecting re-stocking of certain products that were depleted to support certain customer needs during the fourth quarter of 2023. It also reflects the timing of the Good Friday holiday, as our purchasing activities remained steady relative to slower sales at the end of the first quarter of 2024. Net Cash Used in Investing Activities Net cash used in investi ng activities increased by $17.4 in the first quarter of 2024 when compared to the first quarter of 2023. This was due to higher net capital expenditures (purchases of property and equipment, net of proceeds from sales of property and equipment) in the first quarter of 2024 compared to the first quarter of 2023. Our capital spending typically falls into six categories: (1) purchases related to FMI hardware, (2) purchases of property and equipment related to expansion of and enhancements to distribution centers, (3) spending on software and hardware for our information processing systems, (4) the addition of fleet vehicles, (5) expansion, improvement or investment in certain owned or leased branch properties, and (6) the addition of manufacturing and warehouse equipment. Proceeds from the sales of property and equipment, typically for the planned disposition of pick-up trucks as well as distribution vehicles and trailers in the normal course of business, are netted against these purchases an d additions. During the first quarter of 2024, our net capital expenditures were $48.3, which was an increase from $30.9 in the first quarter of 2023. This was primarily due to an increase in spending for facility construction and upgrades, as well as higher vehicle spending reflecting the timing of deliveries from our suppliers. Cash requirements for capital expenditures were satisfied from cash generated from operations, available cash and cash equivalents, our borrowing capacity, and the proceeds of disposals. During the full year of 2024, we continue to expect our investment in property and equipment, net of proceeds from sales, to be within a range of $225.0 to $245.0, increasing from $160.6 in 2023. 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. 19 Table of Contents Net Cash Used in Financing Activities Net cash used in financing ac tivities decreased $81.5 in the first quarter of 2024 when compared to the first quarter of 2023. This was primarily due to debt reduction in the first quarter of 2024 being significantly lower than in the first quarter of 2023 owing to smaller outstanding debt balances. This was only partly offset by an increase in capital returned to shareholders through dividends in the period. During the first quarter of 2024, we returned $223.2 to our shareholders in the form of dividends, compared to the first quarter of 2023 when we returned $199.8 to our shareholders in the form of dividends. We did not repurchase any of our common stock in either period. We have authority to purchase up to 6,200,000 additional shares of our common stock under the July 12, 2022 authorization. This authorization does not have an expiration date. Total debt on our balance sheet was $200.0 at the end of the first quarter of 2024, or 5.5% of total capital (the sum of stockholders' equity and total debt). This compares to $400.0, or 10.9% of total capital, at the end of the first quarter of 2023. The higher level of debt carried in the first quarter of 2023 was due to having used our revolver to finance working capital to mitigate supply chain constraints. With the supply chain normalizing, we have been able to reduce layers of working capital and generate cash flow to lower our level of indebtedness in the first quarter of 2024. Our material cash requirements for known contractual obligations include capital expenditures, debt, and lease obligations, each of which are discussed in more detail earlier in this report in the Notes to Condensed Consolidated Financial Statements and in our 2023 annual report on Form 10-K. An overview of our cash dividends paid or declared in 2024 and 2023 is contained in Note 3 of the Notes to Condensed Consolidated Financial Statements. 20 Table of Contents Critical Accounting Policies and Estimates – A discussion of our critical accounting policies and estimates is contained in our 2023 annual report on Form 10-K. There have been no material changes from the critical accounting policies and estimates disclosed in our annual report on Form 10-K. Recently Issued and Adopted Accounting Pronouncements – A description of recently issued and adopted accounting pronouncements, if any, is contained in Note 1 of the Notes to Condensed Consolidated Financial Statements. Certain Risks and Uncertainties – Certain statements contained in this document do not relate strictly to historical or current facts. As such, they are considered 'forward-looking statements' that provide current expectations or forecasts of future events. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of terminology such as anticipate, believe, should, estimate, expect, intend, may, will, plan, goal, project, hope, trend, target, opportunity, and similar words or expressions, or by references to typical outcomes. Any statement that is not a purely historical fact, including estimates, projections, trends, and the outcome of events that have not yet occurred, is a forward-looking statement. Our forward-looking statements generally relate to our expectations and beliefs regarding the business environment in which we operate, our projections of future performance, our perceived marketplace opportunities, our strategies, goals, mission and vision, our expectations related to future capital expenditures, future investment in property and equipment, future tax rates, future inventory levels, pricing, Onsite and weighted FMI device signings, the impact of inflation on our cost of goods or SG&A expenses, the impact of price increases on overall sales growth or margin performance, and our ability to grow our business through the enhancement of sales through our Digital Footprint. You should understand that forward-looking statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. Factors that could cause our actual results to differ from those discussed in the forward-looking statements include, but are not limited to, economic downturns, weakness in the manufacturing or commercial construction industries, competitive pressure on selling prices, changes in our current mix of products, customers, or geographic locations, changes in our average branch size, changes in our purchasing patterns, changes in customer needs, changes in fuel or commodity prices, inclement weather, changes in foreign currency exchange rates, difficulty in adapting our business model to different foreign business environments and the challenges of operating in foreign business environments, failure to accurately predict the market potential of our business strategies, the introduction or expansion of new business strategies, weak acceptance or adoption of our FMI offering or Onsite business models, increased competition in FMI or Onsite, difficulty in maintaining installation quality as our FMI business expands, the leasing to customers of a significant number of additional FMI devices, the failure to meet our goals and expectations regarding branch openings, branch closings, or expansion of our FMI offering or Onsite operations, changes in the implementation objectives of our business strategies, challenges in developing and expanding our digital capabilities, difficulty in hiring, relocating, training, or retaining qualified personnel, difficulty in controlling SG&A expenses, including FTE growth, difficulty in collecting receivables or accurately predicting future inventory needs, dramatic changes in sales trends, changes in supplier production lead times, the rate at which our supply chain normalizes, changes in our cash position or our need to make capital expenditures, credit market volatility, changes in tax law or the impact of any such changes on future tax rates, changes in tariffs or the impact of any such changes on our financial results, changes in the availability or price of commercial real estate, changes in the nature, price, or availability of distribution, supply chain, or other technology (including software licensed from third parties) and services related to that technology, cyber-security incidents, potential liability and reputational damage that can arise if our products are defective, difficulties measuring the contribution of price increases on sales growth, acts of war, and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission, including our most recent annual and quarterly reports. Each forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any such statement to reflect events or circumstances arising after such date. 21 Table of Contents