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 3,500 in-market locations. Our largest end market is manufacturing. Sales to these customers include 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 nine- and three-month periods ended September 30, 2024 and 2023 . Nine-month Period Three-month Period 2024 2023 Change 2024 2023 Change Net sales $ 5,721.5 5,588.1 2.4 % $ 1,910.2 1,845.9 3.5 % Business days 192 191 64 63 Daily sales $ 29.8 29.3 1.9 % $ 29.8 29.3 1.9 % Gross profit $ 2,583.7 2,555.1 1.1 % $ 858.6 847.6 1.3 % % of net sales 45.2 % 45.7 % 44.9 % 45.9 % Selling, general, and administrative expenses $ 1,418.5 1,380.2 2.8 % $ 470.5 460.9 2.1 % % of net sales 24.8 % 24.7 % 24.6 % 25.0 % Operating income $ 1,165.2 1,174.9 -0.8 % $ 388.1 386.7 0.4 % % of net sales 20.4 % 21.0 % 20.3 % 21.0 % Income before income taxes $ 1,163.8 1,167.8 -0.3 % $ 387.6 385.4 0.6 % % of net sales 20.3 % 20.9 % 20.3 % 20.9 % Net income $ 888.5 888.6 0.0 % $ 298.1 295.5 0.9 % Diluted net income per share $ 1.55 1.55 -0.2 % $ 0.52 0.52 0.7 % 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: Change Since: Q3 2024 Q2 2024 Q2 2024 Q4 2023 Q4 2023 Q3 2023 Q3 2023 Selling personnel - absolute employee headcount 16,666 16,774 -0.6 % 16,512 0.9 % 16,261 2.5 % Selling personnel - FTE employee headcount 15,080 15,386 -2.0 % 15,070 0.1 % 14,750 2.2 % Total personnel - absolute employee headcount 23,518 23,629 -0.5 % 23,201 1.4 % 22,862 2.9 % Total personnel - FTE employee headcount 20,894 21,249 -1.7 % 20,721 0.8 % 20,284 3.0 % Number of branch locations 1,597 1,599 -0.1 % 1,597 — % 1,615 -1.1 % Number of active Onsite locations 1,986 1,934 2.7 % 1,822 9.0 % 1,778 11.7 % Number of in-market locations 3,583 3,533 1.4 % 3,419 4.8 % 3,393 5.6 % Weighted FMI devices (MEU installed count) 123,193 119,306 3.3 % 113,138 8.9 % 110,191 11.8 % During the last twelve months, we increased our total FTE employee headcount by 610. This reflects an increase in our total FTE selling and sales support personnel of 330, which is oriented heavily toward supporting expansion of our Onsite locations. We had an increase in our distribution and transportation FTE personnel of 167 to support increased product throughput at our distribution facilities. We had an increase in our remaining FTE personnel of 113 which relates primarily to personnel investments in IT 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. Nine-month Period Three-month Period 2024 2023 2024 2023 Branch openings 7 8 4 3 Branch closures, net of conversions (7) (76) (6) (23) Onsite activations 268 252 93 79 Onsite closures, net of conversions (104) (97) (41) (29) 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 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. 13 Table of Contents THIRD QUARTER OF 2024 VERSUS THIRD 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 September 30: Three-month Period 2024 2023 Net sales 100.0 % 100.0 % Gross profit 44.9 % 45.9 % Selling, general, and administrative expenses 24.6 % 25.0 % Operating income 20.3 % 21.0 % Net interest expense 0.0 % -0.1 % Income before income taxes 20.3 % 20.9 % Note – Amounts may not foot due to rounding difference. Sales The table below sets forth net sales and daily sales for the periods ended September 30, and changes in such sales from the prior period to the more recent period: Three-month Period 2024 2023 Net sales $ 1,910.2 1,845.9 Percentage change 3.5 % 2.4 % Business days 64 63 Daily sales $ 29.8 29.3 Percentage change 1.9 % 4.0 % Daily sales impact of currency fluctuations -0.1 % -0.1 % Net sale s increa sed $64.2, or 3.5%, in the third quarter of 2024 when compared to the third quarter of 2023. There was one more selling day in the third quarter of 2024 relative to the prior year period and, taking this into consideration, our net daily sales increased 1.9% in the third quarter of 2024 compared to the third quarter of 2023. We estimate the disruption from Hurricane Helene to operations and logistics within our Southeast and Atlantic Coastal regions reduced our daily sales by 5 to 25 basis points in the third quarter of 2024. Changes in foreign exchange rates negatively affected sales in both the third quarter of 2024 and the third quarter of 2023 by approximately 10 basis points. An increase in unit sales in the th ird quarter of 2024 was 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 third quarter of 2024 was not material, in contrast to the third quarter of 2023, when the impact of product pricing was modestly positive. The pricing environment was stable throughout the third quarter of 2024. 14 Table of Contents From a product standpoint, we have three categories: fasteners (including fasteners used in OEM and 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 third quarter of 2024, which we believe primarily relates to two factors. First, fasteners are more heavily oriented toward production of final goods than maintenance, which results in greater susceptibility to periods of weaker industrial production. Second, we continued to experience relatively faster growth with warehousing customers due to market share gains and product mix, which primarily benefits our safety product line. This impact is beginning to moderate as we come up against more difficult comparison periods. 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 -3.1 % 2.4 % 19.0 % 20.0 % MRO fasteners -5.3 % -8.5 % 11.2 % 12.1 % Total fasteners -4.0 % -2.0 % 30.2 % 32.1 % Safety supplies 6.8 % 9.2 % 22.5 % 21.4 % Other product lines 3.7 % 6.8 % 47.3 % 46.5 % Total non-fasteners 4.7 % 7.5 % 69.8 % 67.9 % 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. Our manufacturing end markets are outperforming primarily due to 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. Other end market sales are improving primarily as a result of strength with warehousing customers due to market share gains and product mix. We believe the weakness in our reseller end market reflects efforts in many industries to reduce channel inventories. 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 0.7 % 9.0 % 42.7 % 43.2 % Other manufacturing 6.2 % 2.5 % 32.4 % 31.1 % Total manufacturing 3.0 % 6.2 % 75.1 % 74.3 % Non-residential construction -3.6 % -7.2 % 8.6 % 9.1 % Reseller -11.3 % -6.9 % 5.1 % 5.8 % Other end markets 5.6 % 8.1 % 11.2 % 10.8 % Total non-manufacturing -1.5 % -1.3 % 24.9 % 25.7 % 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 customers. We continued to experience a significant divergence in the performance of our national account customers versus our non-national account customers, which relates to the relative growth of our sales through Onsite locations and larger, key accounts. The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows: DSR Change Three-month Period % of Sales Three-month Period 2024 2023 2024 2023 National accounts 5.6 % 8.6 % 63.6 % 60.8 % Non-national accounts -4.1 % -1.9 % 36.4 % 39.2 % 15 Table of Contents Growth Drivers • We signed 93 new Onsite locations (defined as dedicated sales and service provided from within, or in proximity to, the customer's facility) in the third quarter of 2024, resulting in 302 year-to-date signings of new Onsite locations. We had 1,986 active sites on September 30, 2024, which represented an increase of 11.7% from September 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 third quarter of 2024 over the third 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, although the lower half of this range seems most likely given the pace of signings through the third quarter of 2024. • 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. 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. Three-month Period 2024 2023 Change Weighted FASTBin/FASTVend signings (MEUs) 7,281 5,969 22.0 % Signings per day 114 95 Weighted FASTBin/FASTVend installations (MEUs; end of period) 123,193 110,191 11.8 % FASTStock sales $ 244.7 234.2 4.5 % % of sales 12.7 % 12.5 % FASTBin/FASTVend sales $ 586.8 526.2 11.5 % % of sales 30.3 % 28.2 % FMI sales $ 831.5 760.4 9.3 % FMI daily sales $ 13.0 12.1 7.6 % % of sales 43.0 % 40.7 % • 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 25.6% in the third quarter of 2024 and represented 30.1% of our total sales in the period. In the third quarter of 2024, daily sales through eProcurement and eCommerce grew 33.2% and 6.6%, 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 third quarter of 2024 represented 61.1% of our sales, an increase from 57.1% of sales in the third quarter of 2023. 16 Table of Contents Gross Profit Our gross prof it, as a percentage of net sales, decreased to 44.9% in the third qu arter of 2024 from 45.9% in the third quarter of 2023. Our gross profit percentage was primarily impacted by four factors. First, we experienced unfavorable 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 whole. Second, we experienced higher import duties particularly related to Mexico. Third, we received a large shipper rebate in the third quarter of 2023 that did not recur in the third quarter of 2024. Fourth, supplier rebates were lower, as weaker demand resulted in lower purchasing for products affected by such programs than originally anticipated. Price-cost did not meaningfully impact our gross profit percentage during the third quarter of 2024. SG&A Expenses Our SG&A expenses, as a percentage of net sales, were 24.6% in the third quarter of 2024 versus 25.0% in the third quarter of 2023. The combined effects of one extra selling day in the third quarter of 2024 as compared to the third quarter of 2023 and efforts to control costs in light of soft underlying business activity resulted in total SG&A expenses in the period increasing 2.1%, which was below our rate of net sales growth. Th e percentage change in employee- related, occupancy-related, and all other SG&A expenses compared to the same period 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% 3.5 % Occupancy-related expenses 15% to 20% 4.1 % All other SG&A expenses 10% to 15% -8.4 % 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 third quarter of 2024, our employee-relate d expenses increased when com pared to the third 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 higher health insurance costs. This was partly offset by lower bonus and commission payments reflecting slower sales and profit growth versus the third 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: Q3 2024 Q2 2024 Q2 2024 Q3 2023 Q3 2023 Selling personnel (1) 15,080 15,386 -2.0 % 14,750 2.2 % Distribution/Transportation personnel 3,151 3,172 -0.7 % 2,984 5.6 % Manufacturing personnel 714 721 -1.0 % 704 1.4 % Organizational support personnel (2) 1,949 1,970 -1.1 % 1,846 5.6 % Total personnel 20,894 21,249 -1.7 % 20,284 3.0 % (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 (IT) personnel (35% to 40% of category); and (3) Administrative Support personnel (22% to 27% 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 third quarter of 2024, our occupancy-related expenses increased when compared to the third quarter of 2023. This was primarily a result of modest increases in a number of areas, including general inflation in branch costs, incremental depreciation and other costs associated with hub investments and upgrades, and higher utility costs. 17 Table of Contents All other SG&A expenses include: (1) selling-related transportation, (2) IT expenses, (3) general corporate expenses, which consist of legal expenses, general insurance expenses, travel and marketing expenses, etc., and (4) sales of property and equipment. Combined, all other SG&A expenses decreased in the third quarter of 2024 when compared to the third quarter of 2023. Our largest cost categories, IT expenses and selling-related transportation costs, were relatively stable, with the latter experiencing lower fuel expenses that were mostly offset by slightly higher lease costs. As a result, the reduction in all other SG&A expenses reflects the accumulation of small changes in a number of areas, such as an increase in supplier marketing credits, lower bad debt expense, and a decline in general insurance costs. Operating Income Our operating income, as a percentage of net sales, decreased to 20.3% in the third quarter of 2024 from 21.0% in the third quarter of 2023. Net Interest We had net interest expense of $0.5 in the third quarter of 2024, compared to net interest expense of $1.3 in the third quarter of 2023. We had slightly higher interest income reflecting higher rates earned on our cash balances and slightly lower interest expense as a result of lower average borrowings through the third quarter of 2024. Income Taxes We recorded income tax expense of $89.5 in the third quarter of 2024, or 23.1% of income before income taxes. Income tax expense was $89.9 in the third quarter of 2023, or 23.4% 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 third quarter of 2024 was below our expected ongoing tax rate due to the tax benefits associated with (1) the exercise of stock options during the period and (2) return to provision adjustments processed in the quarter. Net Income Our net income during the third quarter of 2024 was $298.1, an increase of 0.9% compared to the third quarter of 2023. Our diluted net income per share was $0.52 in the third quarter of 2024, which was unchanged from $0.52 in the third quarter of 2023. Liquidity and Capital Resources Cash flow activity was as follows for the periods ended September 30: Three-month Period 2024 2023 Change Net cash provided by operating activities $ 296.9 388.1 -23.5 % Percentage of net income 99.6 % 131.3 % Net cash used in investing activities $ 55.9 43.0 30.0 % Percentage of net income 18.8 % 14.6 % Net cash used in financing activities $ 210.7 286.9 -26.6 % Net Cash Provided by Operating Activities Net cash provided by operating activities decreased $91.2 in the third quarter of 2024 when compared to the third quarter of 2023. The decrease in operating cash flow, as a percent of net income, primarily reflects our operating assets and liabilities being a significant use of cash in the third quarter of 2024 as compared to a significant source of cash in the third quarter of 2023. This was primarily attributable to inventory, which swung to a use of cash in the third quarter of 2024 versus a source of cash in the third quarter of 2023. 18 Table of Contents The dollar and percentage change in accounts receivable, net, inventories, and accounts payable as of September 30, 2024 when compared to September 30, 2023 were as follows: September 30 Twelve-month Dollar Change Twelve-month Percentage Change 2024 2023 2024 2024 Accounts receivable, net $ 1,200.6 1,171.0 $ 29.7 2.5 % Inventories 1,559.5 1,513.8 45.7 3.0 % Trade working capital $ 2,760.1 2,684.8 $ 75.4 2.8 % Accounts payable $ 301.7 275.1 $ 26.5 9.6 % Trade working capital, net $ 2,458.4 2,409.7 $ 48.8 2.0 % Net sales in last three months $ 1,910.2 1,845.9 $ 64.2 3.5 % Note - Amounts may not foot due to rounding difference. The increase in our accounts receivable balance in the third 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 increase in our inventory balance in the third quarter of 2024 was primarily attributable to two factors. First, our inventory increased as a result of growth in sales to our customers. Second, we began to add stock intended to improve service to our in-market locations and generate efficiencies in our hubs. We expect to add $30.0 to $35.0 of inventory, primarily imported fasteners, to support these initiatives, of which approximately 80% was added in the third quarter of 2024. These factors more than offset the effects of soft underlying business activity and modest product cost deflation. The increase in our accounts payable balance in the third quarter of 2024 was primarily attributable to an increase in our product purchases to support the addition of inventory intended to improve service to our in-market locations and generate efficiencies in our hubs. Net Cash Used in Investing Activities Net cash used in investi ng activities increased $12.9 in the third quarter of 2024 when compared to the third quarter of 2023. This was due to an increase in purchases of property and equipment in the third quarter of 2024 compared to the third 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 third quarter of 2024, our net capital expenditures (purchases of property and equipment, net of proceeds from sales of property and equipment) were $55.8, which was an increase from $42.9 in the third 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 $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 a mix of more expensive machines, and an increase in spending on IT. 19 Table of Contents Net Cash Used in Financing Activities Net cash used in financin g activities decreased $76.2 in the third quarter of 2024 when compared to the third quarter of 2023. In the third quarter of 2023, we had higher average borrowings outstanding and were using capital to reduce those balances. In contrast, in the third quarter of 2024, we had lower average borrowings and a smaller proportion of those balances were part of a facility that was eligible for repayment. As a result, we used significantly less capital to reduce debt balances in the third quarter of 2024 relative to the third quarter of 2023. This was partly offset by an increase in capital returned to shareholders through dividends in the period. During the third quarter of 2024, we returned $223.4 to our shareholders in the form of dividends, compared to the third 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 the third 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 $240.0 at the end of the third quarter of 2024, or 6.3% of total capital (the sum of stockholders' equity and total debt). This compares to $260.0, or 7.0% of total capital, at the end of the third quarter of 2023. The reduction in debt in the third 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 exp enditures, 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 NINE MONTHS ENDED SEPTEMBER 30, 2024 VERSUS NINE MONTHS ENDED SEPTEMBER 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 September 30: Nine-month Period 2024 2023 Net sales 100.0 % 100.0 % Gross profit 45.2 % 45.7 % Selling, general, and administrative expenses 24.8 % 24.7 % Operating income 20.4 % 21.0 % Net interest expense 0.0 % -0.1 % Income before income taxes 20.3 % 20.9 % Note – Amounts may not foot due to rounding difference. Sales The table below sets forth net sales and daily sales for the periods ended September 30, and changes in such sales from the prior period to the more recent period: Nine-month Period 2024 2023 Net sales $ 5,721.5 5,588.1 Percentage change 2.4 % 5.7 % Business days 192 191 Daily sales $ 29.8 29.3 Percentage Change 1.9 % 6.3 % Daily sales impact of currency fluctuations -0.1 % -0.4 % Net sales increased $133.4, or 2.4%, in the first nine months of 2024 when compared to the first nine months of 2023. The effect of adverse weather in the first nine months of 2024 was a reduction in sales by 10 to 30 basis points. Changes in foreign exchange rates negatively affected sales in the first nine months of 2024 and 2023 by approximately 10 and 40 basis points, respectively. Unit sales increased in the first nine 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 nine months of 2024 was a decline of 10 to 40 basis points, compared to the first nine months of 2023, which experienced an increase of 190 to 220 basis points. The decline reflects lower fastener pricing, as well as lower pricing in certain safety categories. Incremental pricing actions taken over the past twelve months have been modest in scope, resulting in mostly stable price levels throughout the first nine months of 2024. 21 Table of Contents From a product standpoint, we have three categories: fasteners (including fasteners used in OEM and MRO), safety supplies, and other product lines, the latter of which includes eight smaller product categories, such as tools, janitorial supplies, and cutting tools. In the first nine months of 2024, we continued to experience a divergence in the performance of our fastener versus our non-fastener product lines, which we believe primarily 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 and product mix, which primarily benefits our safety product line. This impact is beginning to moderate as we come up against more difficult comparison periods. 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 Nine-month Period % of Sales Nine-month Period 2024 2023 2024 2023 OEM fasteners -3.1 % 6.3 % 19.4 % 20.4 % MRO fasteners -5.0 % -5.3 % 11.5 % 12.4 % Total fasteners -3.8 % 1.6 % 30.9 % 32.8 % Safety supplies 7.4 % 7.6 % 22.0 % 20.8 % Other product lines 3.5 % 9.6 % 47.1 % 46.4 % Total non-fasteners 4.7 % 9.0 % 69.1 % 67.2 % 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. Our manufacturing end markets are outperforming primarily due to 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. Other end market sales are improving primarily as a result of strength with warehousing customers due to market share gains and product mix. We believe the weakness in our reseller end market, at least in the latter part of the nine-month period, reflects efforts in many industries to reduce channel inventories. 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 Nine-month Period % of Sales Nine-month Period 2024 2023 2024 2023 Heavy manufacturing 1.7 % 13.1 % 43.2 % 43.2 % Other manufacturing 4.2 % 6.5 % 32.0 % 31.4 % Total manufacturing 2.8 % 10.2 % 75.2 % 74.6 % Non-residential construction -5.2 % -6.2 % 8.6 % 9.2 % Reseller -6.7 % -7.1 % 5.4 % 5.9 % Other end markets 6.4 % 1.5 % 10.8 % 10.3 % Total non-manufacturing -0.8 % -3.4 % 24.8 % 25.4 % 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 customers. We continued to experience a significant divergence in the performance of our national account customers versus our non-national account customers, which relates to the relative growth of our sales through Onsite locations and larger, key accounts. The DSR change when compared to the same period in the prior year and the percent of sales in the period were as follows: DSR Change Nine-month Period % of Sales Nine-month Period 2024 2023 2024 2023 National accounts 5.9 % 10.8 % 62.7 % 59.8 % Non-national accounts -4.3 % 0.6 % 37.3 % 40.2 % 22 Table of Contents Growth Drivers The table below summarizes the signings and installations of, and sales through, our FMI devices. Nine-month Period 2024 2023 Change Weighted FASTBin/FASTVend signings (MEUs) 21,194 18,664 13.6 % Signings per day 110 98 Weighted FASTBin/FASTVend installations (MEUs; end of period) 123,193 110,191 11.8 % FASTStock sales $ 728.9 708.6 2.9 % % of sales 12.6 % 12.5 % FASTBin/FASTVend sales $ 1,710.7 1,550.6 10.3 % % of sales 29.5 % 27.4 % FMI sales $ 2,439.6 2,259.2 8.0 % FMI daily sales $ 12.7 11.8 7.4 % % of sales 42.1 % 39.9 % Daily sales through eBusiness grew 27.9% in the first nine months of 2024 and represented 29.1% of our total sales in the period. In the first nine months of 2024, daily sales through eProcurement and eCommerce grew 33.3% and 13.9%, respectively. Our Digital Footprint in the first nine months of 2024 represented 59.9% of our sales, an increase from 55.5% of sales in the first nine months of 2023. Gross Profit In the first nine months of 2024, our gross profit, as a percentage of net sales, declined to 45.2% from 45.7% in the first nine months of 2023. The largest factor behind the decline in our gross profit percentage in the first nine months of 2024 was 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. We also experienced higher import duties, particularly related to Mexico as a result of significant increases in duty fees instituted in that country over the past 13 months. These adverse impacts were partly offset by slightly favorable price-cost and slightly favorable leverage of organizational/overhead costs through the first nine months of 2024. The latter was 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 24.8% in the first nine months of 2024 from 24.7% in the first nine months of 2023. Efforts to control growth in operating expenses in the first nine months of 2024 produced a modest 2.8% expansion of total SG&A expenses in the period. Notwithstanding this, growth in net sales was below growth in SG&A expenses, resulting in our slight deleveraging of costs in the first nine months of 2024. Th e percentage change in employee- related, occupancy-related, and all other SG&A expenses compared to the same period in the preceding year, is outlined in the table below. Approximate Percentage of Total SG&A Expenses Nine-month Period 2024 Employee-related expenses 70% to 75% 3.3 % Occupancy-related expenses 15% to 20% 1.3 % All other SG&A expenses 10% to 15% 1.7 % 23 Table of Contents In the first nine months of 2024, our employee-related expenses increased when compared to the first nine 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 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: Change Since: Q3 2024 Q4 2023 Q4 2023 Selling personnel (1) 15,080 15,070 0.1 % Distribution/Transportation personnel 3,151 3,095 1.8 % Manufacturing personnel 714 697 2.4 % Organizational support personnel (2) 1,949 1,859 4.8 % Total personnel 20,894 20,721 0.8 % (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) IT personnel (35% to 40% of category); and (3) Administrative Support personnel (22% to 27% of category), which includes human resources, Fastenal School of Business, accounting and finance, senior management, etc. In the first nine months of 2024, our occupancy-related expenses increased when compared to the first nine 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 partly 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 nine months of 2023 more than offset higher depreciation resulting from growth in bins. Combined, all other SG&A expenses increased in the first nine months of 2024 when compared to the first nine months of 2023. This reflects a number of items. We experienced 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. We incurred higher expenses related to our Customer Expo as a result of the event being larger than we had originally expected. We also saw a modest increase in IT spending and general insurance costs. Operating Income Our operating income, as a percentage of net sales, declined to 20.4% in the first nine months of 2024 from 21.0% in the first nine months of 2023. Net Interest Our net interest expense was $1.4 in the first nine months of 2024, compared to net interest expense of $7.1 in the first nine 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 first nine months of 2024, partly offset by slightly higher rates paid on our debt balances. Income Taxes We recorded income tax expense of $275.3 in the first nine months of 2024, or 23.7% of income before income taxes. Income tax expense was $279.2 in the first nine months of 2023, or 23.9% 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 nine months of 2024 was below our expected ongoing tax rate due to (1) the tax benefits associated with the exercise of stock options during the period and (2) return to provision adjustments processed in the third quarter of 2024. Net Income Our net income during the first nine months of 2024 was $888.5, which was approximately flat compared to the first nine months of 2023. Our diluted net income per share was $1.55 in the first nine months of 2024, which was unchanged from $1.55 in the first nine months of 2023 . 24 Table of Contents Liquidity and Capital Resources Cash flow activity was as follows for the periods ended September 30: Nine-month Period 2024 2023 Change Net cash provided by operating activities $ 890.5 1,078.7 -17.4 % Percentage of net income 100.2 % 121.4 % Net cash used in investing activities $ 157.0 128.2 22.5 % Percentage of net income 17.7 % 14.4 % Net cash used in financing activities $ 663.6 879.1 -24.5 % Net Cash Provided by Operating Activities Net cash provided by op erating activities decreased $188.2 in the first nine months of 2024 when compared to the first nine months of 2023 . The decrease in operating cash flow, as a percent of net income, was driven by the same variables as the third quarter of 2024, primarily attributable to inventory shifting to a use of cash in the first nine months of 2024 versus a significant source of cash in the first nine months of 2023. Net Cash Used in Investing Activities Net cash used in investing activities increased $28.8 in the first nine months of 2024 when compared to the first nine months of 2023. This was primarily due to an increase in net capital expenditures in the first nine months of 2024 compared to in the first nine months of 2023. During the first nine months of 2024, our net capital expenditures were $156.7, which was an increase from $127.7 in the first nine months of 2023. This was primarily related to two factors. First, spending on FMI was 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. 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 $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 a mix of more expensive machines, and an increase in spending on IT. Net Cash Used in Financing Activities Net cash used in financing activities decreased $215.5 in the first nine months of 2024 when compared to the first nine months of 2023. In the first nine months of 2024, we had average borrowings outstanding and were using capital to reduce those balances. In contrast, in the first nine months of 2023, we had lower average borrowings and a smaller proportion of those balances were part of a facility that was eligible for repayment. As a result, we used significantly less capital to reduce debt balances in the first nine months of 2024 relative to the first nine months of 2023. This was partly offset by an increase in capital returned to shareholders through dividends in the period. During the first nine months of 2024, we returned $669.9 to our shareholders in the form of dividends, compared to the first nine months of 2023 when we returned $599.5 to our shareholders in the form of dividends. We did not repurchase any of our common stock in the first nine months of 2024 or 2023. 25 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 or any of our end markets, 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. 26 Table of Contents