What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-07-17 compared with 2024-04-16 · 270 added, 98 removed, 188 unchanged (66% of the section changed)

14 unchanged sentences

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

The following table presents a performance summary of our results of operations for the six- and three-month periods ended June 30, 2024 and 2023 .

Six-month Period Three-month Period

2024 2023 Change 2024 2023 Change

Net sales $ 3,811.3 3,742.2 1.8 % $ 1,916.2 1,883.1 1.8 %

23 unchanged sentences

During the last twelve months, we increased our total FTE employee headcount by 618.

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.

This reflects an increase in our total FTE selling and sales support personnel of 393, which is oriented heavily toward supporting expansion of our Onsite locations.

We had an increase in our distribution and transportation FTE personnel of 119 to support increased product throughput at our distribution facilities.

We had an increase in our remaining FTE personnel of 106 which relates primarily to personnel investments in information technology and business analytics.

The table below summarizes the number of branches opened and closed, net of conversions, as well as the number of Onsites activated and closed, net of conversions during the periods presented.

Three-month Period

Six-month Period Three-month Period

2024 2023 2024 2023

Branch openings 3 5 3 3

6 unchanged sentences

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.

FIRST QUARTER OF 2024 VERSUS FIRST QUARTER OF 2023

As a result, we expect to see an increase in the rate of in-market location growth as we continue to open Onsites while our traditional branch network remains stable or grows moderately to sustain and improve our North American network, to continue our global expansion beyond North America, and to support our growth drivers.

SECOND QUARTER OF 2024 VERSUS SECOND 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:

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

Three-month Period

6 unchanged sentences

Note – Amounts may not foot due to rounding difference.

The table below sets forth net sales and daily sales for the periods ended March 31, and changes in such sales from the prior period to the more recent period:

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

Three-month Period

5 unchanged sentences

Daily sales impact of currency fluctuations -0.2 % -0.4 %

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.

Net sales increased $33.1, or 1.8%, in the second quarter of 2024 when compared to the second quarter of 2023.

Both periods had the same number of selling days.

Changes in foreign exchange rates negatively affected sales in the second quarter of 2024 and 2023 by approximately 20 and 40 basis points, respectively.

We experienc e d higher unit sales in the second quarter of 2024 primarily due to growth with larger customers and Onsite locations opened in the last two years.

The impact of product pricing on net sales in the second quarter of 2024 was a decline of 30 to 60 basis points, in contrast to the second quarter of 2023, which experienced an increase of 190 to 220 basis points.

The decline reflects lower fastener pricing, which is a by-product of lower transportation costs, as well as lower pricing in certain safety and other products categories.

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.

We continued to experience a divergence in the performance of our fastener versus our non-fastener product lines in the second 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.

Third, we continued to experience relatively faster growth with warehousing customers due to market share gains, product mix, and easier comparisons.

This factor primarily benefited our safety product line.

8 unchanged sentences

Other product lines 3.0 % 9.8 % 47.2 % 46.7 %

Total non-fasteners 4.2 % 9.2 % 69.0 % 67.4 %

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.

This factor primarily benefited our other product lines.

We continued to experience a modest divergence in the performance of our manufacturing end market versus our non-manufacturing end markets in the second quarter of 2024.

This primarily reflects the relative strength we are experiencing with key account customers with significant managed spend where our service model and technology is particularly impactful.

This disproportionately benefits manufacturing customers.

The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

8 unchanged sentences

Other end markets 6.0 % 0.2 % 10.7 % 10.3 %

Total non-manufacturing -1.0 % -5.3 % 24.5 % 25.2 %

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:

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

The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

Three-month Period % of Sales

4 unchanged sentences

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.

• We signed 107 new Onsite locations (defined as dedicated sales and service provided from within, or in proximity to, the customer's facility) in the second quarter of 2024, resulting in 209 year-to-date signings of new Onsite locations.

We had 1,934 active sites on June 30, 2024, which represented an increase of 11.9% from June 30, 2023.

Daily sales through our Onsite locations, excluding sales transferred from branches to new Onsites, grew at a low single-digit rate in the second quarter of 2024 over the second quarter of 2023.

This growth is due to contributions from Onsites activated and implemented in 2024 and 2023, which more than offset the impact of closures and a decline in revenues from Onsites activated prior to 2023.

Our goal for Onsite signings in 2024 remains between 375 to 400.

6 unchanged sentences

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.

Our goal for weighted FASTBin and FASTVend device signings in 2024 remains between 26,000 to 28,000 MEUs.

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

12 unchanged sentences

% of sales 41.8 % 39.8 %

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.

• Our eBusiness includes eProcurement activities [e.g., integrated transactions, including electronic data interchange (EDI)] and eCommerce (transactional website sales).

Growth of our eBusiness reflects both new sales that enhance our growth rate and a shift in existing sales from non-digital to digital processes that improves efficiency.

Daily sales through eBusiness grew 25.5% in the second quarter of 2024 and represented 28.7% of our total sales in the period.

In the second quarter of 2024, daily sales through eProcurement and eCommerce grew 30.9% and 11.6%, respectively.

Our digital products and services are comprised of sales through FMI (FASTStock, FASTBin, and FASTVend) plus that proportion of our eBusiness 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 r educes risk in operations and creates ordering and fulfillment efficiencies for both us 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.

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.

Our Digital Footprint in the second quarter of 2024 represented 59.4% of our sales, an increase from 55.3% of sales in the second quarter of 2023.

Our gross prof it, as a percentage of net sales, decreased to 45.1% in the second qu arter of 2024 from 45.5% in the second quarter of 2023.

Our gross profit percentage was primarily impacted by two factors.

First, we experienced unfavorable customer and product mix.

Second, as we disclosed in our April 2024 earnings call, we incurred short-term inefficiencies in our supply chain to support certain warehousing customers, which we believe will contribute to our future growth in this end market.

We expect these inefficiencies will ease as we move through the third quarter of 2024 and normalize as we approach the fourth quarter of 2024.

These factors were partly offset by 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.

Price-cost did not meaningfully impact our gross profit percentage during the second quarter of 2024.

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.

Our SG&A expenses, as a percentage of net sales, were 24.9% in the second quarter of 2024 versus 24.6% in the second quarter of 2023.

Efforts to control growth in operating expenses in the second quarter of 2024 produced a modest 3.0% expansion of total SG&A in the period.

Notwithstanding this, growth in net sales was below growth in SG&A, resulting in our deleveraging of costs in the second 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.

5 unchanged sentences

(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.

In the second quarter of 2024, our employee-relate d expenses increased when com pared to the second quarter of 2023.

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

This was only partly offset by lower bonus and commission payments reflecting slower sales and profit growth versus the second 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:

13 unchanged sentences

(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.

In the second quarter of 2024, our occupancy-related expenses increased when compared to the second quarter of 2023.

We had moderate increases in branch costs related to general inflation, as well as non-branch expenses from incremental depreciation and other costs associated with hub investments and upgrades.

This was mostly offset by lower FMI expense where the roll-off of depreciation on a large number of vending devices that had reached the end of their depreciable lives in the second quarter of 2023 more than offset higher depreciation resulting from growth in bins.

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.

Combined, all other SG&A expenses increased in the second quarter of 2024 when compared to the second quarter of 2023.

This reflects primarily three items.

First, we had 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.

Second, as we had disclosed in our April 2024 earnings call, we incurred significant expenses related to our Customer Expo as a result of the event being larger than we had originally expected.

Third, we experienced an increase in general insurance expenses.

These items were partly offset by a reduction in spending related to travel, meals, and supplies.

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.

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.

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.

Our operating income, as a percentage of net sales, decreased to 20.2% in the second quarter of 2024 from 21.0% in the second quarter of 2023.

We had net interest expense of $0.5 in the second quarter of 2024, compared to net interest expense of $2.3 in the second quarter of 2023.

We had higher interest income reflecting higher rates earned on our cash balances.

We had lower interest expense, reflecting lower average borrowings through the period only partly offset by slightly higher rates paid on our debt balances.

We recorded income tax expense of $93.7 in the second quarter of 2024, or 24.2% of income before income taxes.

Income tax expense was $94.6 in the second quarter of 2023, or 24.1% 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.

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.

Our net income during the second quarter of 2024 was $292.7, a decrease of 1.8% compared to the second quarter of 2023.

Our diluted net income per share was $0.51 in the second quarter of 2024, compared to $0.52 in the second quarter of 2023.

Liquidity and Capital Resources

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

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

Three-month Period

6 unchanged sentences

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.

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

Net cash provided by operating activities decreased $44.1 in the second quarter of 2024 when compared to the second quarter of 2023.

The decrease in operating cash flow, as a percent of net income, reflects our operating assets and liabilities being a more significant use of cash in the second quarter of 2024 than we experienced in the second quarter of 2023.

In particular, inventory swung to a modest use of cash in the second quarter of 2024 versus a significant source of cash in the second quarter of 2023.

This more than offset modest benefits to cash from other working capital items.

For comparison, our five-year average of net cash provided by operating activities as a percent of net income in the second quarter is 78.6%.

The dollar and percentage change in accounts receivable, net, inventories, and accounts payable as of June 30, 2024 when compared to June 30, 2023 were as follows:

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

2024 2023 2024 2024

6 unchanged sentences

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.

The increase in our accounts receivable balance in the second 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.

The decrease in our inventory balance in the second quarter of 2024 reflects three factors.

First, customers are consuming less inventory as they adjust production to address soft demand.

Second, we have made progress 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.

Third, we have also experienced modest deflation in our inventory.

The increase in our accounts payable balance in the second quarter of 2024 was primarily attributable to our product purchases increasing to support the growth in our business and to reflect a normalization of purchasing activity versus the year ago period when purchasing was subdued by efforts to rightsize inventory.

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.

Net cash used in investi ng activities decreased $1.5 in the second quarter of 2024 when compared to the second quarter of 2023.

This was due primarily to slightly higher proceeds from sales of property and equipment in the second quarter of 2024 compared to the second quarter of 2023.

Our capital spending typically falls into five categories:

(1) purchases related to FMI hardware, (2) purchases of property and equipment related to expansion of and enhancements to distribution centers, owned or leased branch properties, and other company facilities, (3) spending on software and hardware for our information processing systems, (4) the addition of fleet vehicles, and (5) the addition of manufacturing 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.

During the second quarter of 2024, our net capital expenditures (purchases of property and equipment, net of proceeds from sales of property and equipment) were $52.6, which was comparable to $53.9 in the second quarter of 2023.

Cash requirements for capital expenditures were satisfied from cash generated from operations, available cash and cash equivale nts, our borrowing capacity, and the proceeds of disposals.

For the full year of 2024, we expect our net capital expenditures to be within a range of $235.0 to $255.0, an increase from our originally anticipated range ($225.0 to $245.0) and an increase from $160.6 in 2023.

The expected growth on a year-to-year basis is based on 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 an increase in spending on information technology.

The increase from our original expected range for investment in net capital expenditures reflects an increase in expected investment in vending devices to reflect both strong signings and that those signings are concentrated more heavily in higher-value, higher-cost units.

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.

Net cash used in financin g activities decreased $57.8 in the second quarter of 2024 when compared to the second quarter of 2023.

This was primarily due to an increase in debt in the second quarter of 2024 relative to a reduction of debt in the second quarter of 2023.

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.

During the second quarter of 2024, we returned $223.3 to our shareholders in the form of dividends, compared to the second quarter of 2023 when we returned $199.9 to our shareholders in the form of dividends.

We did not repurchase any of our common stock in the second quarter of 2024 or 2023.

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.

Total debt on our balance sheet was $235.0 at the end of the second quarter of 2024, or 6.3% of total capital (the sum of stockholders' equity and total debt).

This compares to $350.0, or 9.4% of total capital, at the end of the second quarter of 2023.

The reduction in debt in the second quarter of 2024 versus the prior period reflects strong generation of net cash provided by operating activities over the last 12 months in excess of what was necessary to finance net capital expenditures, payment of dividends, and other investing and financing cash needs.

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.

SIX MONTHS ENDED JUNE 30, 2024 VERSUS SIX MONTHS ENDED JUNE 30, 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 June 30:

Six-month Period

Net sales 100.0 % 100.0 %

Gross profit 45.3 % 45.6 %

Selling, general, and administrative expenses 24.9 % 24.6 %

Operating income 20.4 % 21.1 %

Net interest expense 0.0 % -0.2 %

Income before income taxes 20.4 % 20.9 %

Note – Amounts may not foot due to rounding difference.

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

Six-month Period

Net sales $ 3,811.3 3,742.2

Percentage change 1.8 % 7.5 %

Business days 128 128

Daily sales $ 29.8 29.2

Percentage Change 1.8 % 7.5 %

Daily sales impact of currency fluctuations -0.1 % -0.5 %

Net sales increased $69.1, or 1.8%, in the first six months of 2024 when compared to the first six months of 2023.

The effect of adverse weather in the first six months of 2024 was a reduction in sales by 15 to 35 basis points.

Changes in foreign exchange rates negatively affected sales in the first six months of 2024 and 2023 by approximately 10 and 50 basis points, respectively.

We experienced higher unit sales in the first six months of 2024, which contributed to the increase in net sales in the period.

This was primarily due to growth with large customers, both those operating out of Onsite locations that have been opened in the last two years and, to a lesser degree, those being serviced from traditional branch operations.

The impact of product pricing on net sales in the first six months of 2024 was a decline of 10 to 40 basis points, in contrast to the first six months of 2023, which experienced an increase of 240 to 270 basis points.

Incremental pricing actions taken over the past twelve months have been modest in scope, resulting in mostly stable price levels throughout the first six months of 2024.

We did see modest softening in pricing in the back half of the period.

From a product standpoint, we have three categories:

In the first six months of 2024, we continued to experience a divergence in the performance of our fastener versus our non-fastener product lines, 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, we continued to experience relatively faster growth with warehousing 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:

Six-month Period

2024 2023 2024 2023

OEM fasteners -3.2 % 8.2 % 19.6 % 20.6 %

MRO fasteners -4.7 % -3.7 % 11.7 % 12.5 %

Total fasteners -3.7 % 3.4 % 31.3 % 33.1 %

Safety supplies 7.7 % 6.8 % 21.7 % 20.5 %

Other product lines 3.4 % 11.1 % 47.0 % 46.4 %

Total non-fasteners 4.7 % 9.7 % 68.7 % 66.9 %

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 significant divergence in the performance of our manufacturing end market versus our non-manufacturing end markets in the first six months of 2024, although the scale of that divergence has continued to narrow.

This primarily reflects the relative strength we are experiencing with key account customers with significant managed spend where our service model and technology is particularly impactful.

This disproportionately benefits manufacturing customers.

The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

Six-month Period

2024 2023 2024 2023

Heavy manufacturing 2.2 % 15.3 % 43.4 % 43.2 %

Other manufacturing 3.3 % 8.6 % 31.9 % 31.5 %

Total manufacturing 2.7 % 12.3 % 75.3 % 74.7 %

Non-residential construction -6.1 % -5.7 % 8.5 % 9.2 %

Reseller -4.4 % -7.2 % 5.5 % 5.9 %

Other end markets 6.8 % -1.7 % 10.7 % 10.2 %

Total non-manufacturing -0.5 % -4.5 % 24.7 % 25.3 %

We report our customers in two categories:

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

The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows:

Six-month Period

2024 2023 2024 2023

National accounts 6.1 % 12.0 % 62.2 % 59.3 %

Non-national accounts -4.4 % 1.8 % 37.8 % 40.7 %

Growth Drivers

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

Six-month Period

2024 2023 Change

Weighted FASTBin/FASTVend signings (MEUs) 13,914 12,695 9.6 %

Signings per day 109 99

Weighted FASTBin/FASTVend installations (MEUs;

end of period) 119,306 107,115 11.4 %

FASTStock sales $ 484.2 474.4 2.1 %

% of sales 12.5 % 12.5 %

FASTBin/FASTVend sales $ 1,123.9 1,024.3 9.7 %

% of sales 29.1 % 27.0 %

FMI sales $ 1,608.1 1,498.7 7.3 %

FMI daily sales $ 12.6 11.7 7.3 %

% of sales 41.7 % 39.6 %

Daily sales through eBusiness grew 29.1% in the first six months of 2024 and represented 28.6% of our total sales in the period.

In the first six months of 2024, daily sales through eProcurement and eCommerce grew 33.4% and 18.0%, respectively.

Our Digital Footprint in the first six months of 2024 represented 59.2% of our sales, an increase from 54.7% of sales in the first six months of 2023.

In the first six months of 2024, our gross profit, as a percentage of net sales, declined to 45.3% from 45.6% in the first six months of 2023.

The change in our gross profit percentage primarily related to customer and product mix.

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

This was partly offset by two items.

First, we had slightly favorable price-cost through the first six months of 2024.

Second, we experienced 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 six months of 2024 from 24.6% in the first six months of 2023 .

Efforts to control growth in operating expenses in the first six months of 2024 produced only modest expansion of total SG&A in the period.

Notwithstanding this, growth in net sales was below growth in SG&A, resulting in our deleveraging of costs in the first six months 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 Six-month Period

Employee-related expenses 70% to 75% 3.2 %

Occupancy-related expenses 15% to 20% 0.0 %

All other SG&A expenses 10% to 15% 6.9 %

In the first six months of 2024, our employee-related expenses increased when compared to the first six months of 2023.

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

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

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

Selling personnel (1)

15,386 15,070 2.1 %

Distribution/Transportation personnel 3,172 3,095 2.5 %

Manufacturing personnel 721 697 3.4 %

Organizational support personnel (2)

1,970 1,859 6.0 %

Total personnel 21,249 20,721 2.5 %

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.;

(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.

In the first six months of 2024, our occupancy-related expenses were flat when compared to the first six months of 2023.

We had moderate increases in branch costs related to general inflation as well as non-branch expenses from incremental depreciation and other costs associated with hub investments and upgrades.

This was mostly offset by lower FMI expense where the roll-off of depreciation on a large number of vending devices that had reached the end of their depreciable lives in the first six months of 2023 more than offset higher depreciation resulting from growth in bins.

Combined, all other SG&A expenses increased in the first six months of 2024 when compared to the first six months of 2023.

This reflects primarily three items.

First, we had 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.

Second, as we disclosed in our April 2024 earnings call, we incurred significant expenses related to our Customer Expo as a result of the event being larger than we had originally expected.

Third, we experienced an increase in general insurance expenses.

Operating Income

Our operating income, as a percentage of net sales, declined to 20.4% in the first six months of 2024 from 21.1% in the first six months of 2023.

Our net interest expense was $0.9 in the first six months of 2024, compared to net interest expense of $5.8 in the first six months of 2023 .

We had higher interest income reflecting higher rates earned on our cash balances.

We had lower interest expense, reflecting lower average borrowings through the period only partly offset by slightly higher rates paid on our debt balances.

We recorded income tax expense of $185.8 in the first six months of 2024, or 23.9% of income before income taxes.

Income tax expense was $189.2 in the first six months of 2023, or 24.2% 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 six months of 2024 was below our expected ongoing tax rate due to the tax benefits associated with the exercise of stock options during the period.

Our net income during the first six months of 2024 was $590.4, a decrease of 0.5% when compared to the first six months of 2023.

Our diluted net income per share was $1.03 in the first six months of 2024, compared to $1.04 in the first six months of 2023 .

Liquidity and Capital Resources

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

Six-month Period

2024 2023 Change

Net cash provided by operating activities $ 593.6 690.6 -14.0 %

Percentage of net income 100.5 % 116.4 %

Net cash used in investing activities $ 101.1 85.2 18.7 %

Percentage of net income 17.1 % 14.4 %

Net cash used in financing activities $ 452.9 592.2 -23.5 %

Net Cash Provided by Operating Activities

Net cash provided by operating activities decreas ed $97.0 in the first six months of 2024 when compared to the first six months of 2023 .

The decrease in operating cash flow, as a percentage of net income, reflects our operating assets and liabilities being a significant use of cash in the first six months of 2024 versus our operating assets and liabilities being a modest source of cash in the first six months of 2023.

In particular, inventory was a significantly more modest source of cash in the first six months of 2024 than we experienced in the first six months of 2023.

For comparison, our five-year average of net cash provided by operating activities as a percent of net income in the first six months of the calendar year is 95.8%.

Net Cash Used in Investing Activities

Net cash used in investing activities increased $15.9 in the first six months of 2024 when compared to the first six months of 2023.

This was primarily due to an increase in net capital expenditures in the first six months of 2024 compared to in the first six months of 2023.

During the first six months of 2024, our net capital expenditures were $100.9, which was an increase from $84.8 in the first six months of 2023.

This was primarily related to three factors.

First, spending on FMI is higher based on strong signings and installations, particularly of higher-end and higher-cost vending devices.

Second, we have had an increase in spending for facility construction and upgrades.

Third, higher vehicle spending reflects the timing of deliveries from our suppliers.

Net Cash Used in Financing Activities

Net cash used in financing activities decreased $139.3 in the first six months of 2024 when compared to the first six months of 2023.

This was primarily due to reducing our indebtedness significantly less in the first six months of 2024 than we did in the first six months of 2023.

This was only partly offset by an increase in capital returned to shareholders through dividends in the period.

During the first six months of 2024, we returned $446.5 to our shareholders in the form of dividends, compared to the first six months of 2023 when we returned $399.7 to our shareholders in the form of dividends.

We did not repurchase any of our common stock in the first half of 2024 or 2023.

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.

9 unchanged sentences

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.

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, the failure to realize expected benefits from the completion of our strategic rationalization, 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, short-term inefficiencies in our supply chain may not normalize or result in certain warehousing customer growth, 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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis