What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-06 compared with 2024-02-06 · 293 added, 264 removed, 415 unchanged (57% of the section changed)

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Our largest end market is manufacturing.

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

Sales to these customers include products for both OEM, where our products are consumed in the final products of our customers, and 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.

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It is helpful to appreciate several aspects of our marketplace:

First, it is big.

First, it is big and fragmented.

We estimate the North American marketplace for industrial supplies is in excess of $140 billion per year (and we have expanded beyond North America) and no company has a significant portion of this market.

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% of net sales 45.1 % 45.7 % 46.1 %

Operating and administrative expenses $ 1,825.8 1,762.2 3.6 % $ 1,559.8 13.0 %

SG&A expenses $ 1,891.9 1,825.8 3.6 % $ 1,762.2 3.6 %

% of net sales 25.1 % 24.9 % 25.2 %

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% of net sales 20.0 % 20.8 % 20.8 %

Earnings before income taxes $ 1,522.0 1,440.0 5.7 % $ 1,207.8 19.2 %

Income before income taxes $ 1,508.1 1,522.0 -0.9 % $ 1,440.0 5.7 %

% of net sales 20.0 % 20.7 % 20.6 %

Net earnings $ 1,155.0 1,086.9 6.3 % $ 925.0 17.5 %

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

Note – Daily sales are defined as the total net sales for the period divided by the number of business days (in the United States) in the period.

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

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

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

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

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

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

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

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

Net income $ 1,150.6 1,155.0 -0.4 % $ 1,086.9 6.3 %

Diluted net income per share $ 2.00 2.02 -0.6 % $ 1.89 6.7 %

Note – Daily sales are defined as the total net sales for the period divided by the number of business days (in the U.S.) in the period.

We saw modest economic contraction in our key markets in 2024.

The Institute for Supply Management's Purchasing Manager's Index (PMI) for the U.S.

averaged 48.3 for the full year and remained below 50, the threshold demarcating manufacturing growth or contraction, in 11 out of 12 months.

Business activity as measured by U.S.

Industrial Production declined 0.4% in the first 11 months of 2024 over 2023 with markets that are most relevant to us, such as Primary Metal (-1.5%), Fabricated Metals (-0.8%), and Machinery (-2.2%) declining more rapidly than the broad index.

This was the primary factor contributing to daily sales growth of 1.9%, slowing from the preceding year.

The overall profile of our growth was consistent with 2023:

growth was driven by larger, key accounts and Onsite customers and by non-fastener products, particularly safety.

We continued to expand our installed base of Onsites and FMI technology and lift the proportion of sales that run through our Digital Footprint.

However, the effect of our continued investment in key areas we view as critical to accelerate future growth and the slow growth in sales volume combined to pressure our profitability, reducing operating margin.

On the other hand, asset efficiency remained stable from the preceding year and we generated good cash flow.

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

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During the last twelve months, we increased our total FTE employee headcount by 237.

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

We had an increase in our distribution and transportation FTE personnel of 124 to support increased product throughput at our facilities and to expand our local inventory fulfillment terminals (LIFTs).

We had an increase in our remaining FTE personnel of 149 that relates primarily to personnel investments in information technology, manufacturing, and operational support, such as purchasing and product development.

Our total FTE selling and sales support personnel decreased by 15.

While we added FTE to support growth in our Onsite locations, we reduced personnel at our branch locations, reflecting both shifts to Onsite locations and tight management of headcount given challenging business conditions.

We had an increase in our distribution and transportation FTE personnel of 115 to support increased product throughput at our distribution facilities.

We had an increase in our remaining FTE personnel of 137, which related primarily to personnel investments in manufacturing, quality control, 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.

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Branch closures, net of conversions (11) (96)

% of net closures vs.

prior year-end number of branch locations -0.7 % -5.7 %

Onsite activations 343 329

Onsite closures, net of conversions (134) (130)

% of net closures vs.

prior year-end number of Onsite locations -7.4 % -8.0 %

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

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

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

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

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

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.

This dynamic played out in 2024.

CURRENT YEAR RESULTS ENDED 2024

Results of Operations

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

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

Net sales 100.0 % 100.0 %

Gross profit 45.1 % 45.7 %

Operating and administrative expenses 24.9 % 25.2 %

SG&A expenses

25.1 % 24.9 %

Operating income 20.0 % 20.8 %

Net interest expense 0.0 % -0.1 %

Earnings before income taxes 20.7 % 20.6 %

Income before income taxes 20.0 % 20.7 %

Note – Amounts may not foot due to rounding difference.

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Daily sales impact of currency fluctuations -0.1 % -0.3 %

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

The increase in net sales noted above for 2024 was primarily due to higher unit sales of MRO, OEM, and construction supplies.

We believe higher unit sales in 2024 were primarily a result of our ability to gain market share, as most measures of industrial activity were flat to down throughout the period.

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

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

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

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

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

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

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

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

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

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

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

Despite this challenging environment, in 2024 we produced net sales growth of 2.7% and, owing to two more selling days in the period, daily sales growth of 1.9%.

We estimate the disruption to operations and logistics from severe winter weather in January 2024 and hurricanes in September 2024, while meaningful in the months in which they occurred, were not material to net sales for the full year of 2024.

Changes in product pricing did not have a material impact on net sales in 2024.

We effectively increased the penetration of key growth initiatives in 2024, as judged by installations and adoption, which enhanced the value we provide to our customers and supported our growth and efficiency.

This was achieved through three areas.

First, we signed 358 Onsites in 2024, below our goal of 375 to 400 units but constituting expansion from 2023 (326 signings) and consistent with previous peak signing years in 2019 (362 signings) and 2022 (356 signings).

Our installed base of Onsites was 2,031 at the end of December 2024, +11.5% over the preceding year.

Second, we signed 27,984 FMI MEUs, meeting our goal at the start of 2024 of 26,000 to 28,000 MEUs and meaningfully above prior year signings of 24,126 MEUs.

Our installed base of FMI MEUs was 126,957 at the end of December, +12.2% over the end of December 2023.

Third, we expanded the proportion of our sales running through our Digital Footprint.

This measure reached 62.5% in November 2024 before easing modestly to 62.1% in December 2024.

This was below our goal at the start of 2024 of 66.0%, attributable to lower volume through our FMI devices due to weaker business activity.

Even so, it was meaningfully above the prior year level of 56.1% reflecting increasing internal and external adoption of our digital resources.

We expect that at some point during 2025 we will achieve having 66% to 68% of our sales volume running through Digital Footprint.

Sales by Product Line

From a product standpoint, we have three categories:

fasteners, safety supplies, and other product lines, the latter of which includes eight smaller product categories, such as tools, janitorial supplies, and cutting tools.

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.

The percent of sales in the periods below were as follows:

Fasteners 32.4 % 34.0 %

OEM fasteners 19.3 % 20.1 %

MRO fasteners 11.4 % 12.3 %

Total fasteners 30.7 % 32.4 %

Safety supplies 22.2 % 21.2 %

Other product lines 47.1 % 46.4 %

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

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

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

Total non-fasteners 69.3 % 67.6 %

We experienced a shift in mix away from fasteners and toward safety supplies and other product lines.

We experienced a slight decline in sales for fasteners in 2024 due primarily to weak business activity during the year.

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

In contrast, safety supplies experienced relatively faster growth.

This is a result of lower cyclicality due to the products being used in MRO applications, growth in our installed base of vending devices which disproportionately dispense personal protective equipment (PPE), and strong growth with warehousing customers who are strong consumers of PPE.

Other product lines is a mix of OEM- and MRO-oriented products, and relatively strong growth within the latter (e.g., janitorial) was partially offset by relatively slow growth in the former (e.g., tools, cutting tools, material handling).

These dynamics produced a meaningful divergence in the daily sales growth rates of our fastener versus our non-fastener product lines in 2024.

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Sequential Trends

We find it helpful to think about the monthly sequential changes in our business using the analogy of climbing a stairway – This stairway has several predictable landings where there is a pause in the sequential gain (i.e.

April, July, and October to December), but generally speaking, climbs from January to October.

The October landing then establishes the benchmark for the start of the next year.

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In a year where demand is weak, we will tend to have more months that fall short of the benchmark than exceed it.

In both cases, there is a random element that makes it difficult to know how any single month will perform.

In both cases, there is a random element that makes it difficult to know how any single month will perform and puts greater relevance on performance trends over multiple periods.

May June July Aug.

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As COVID-19-related surge sales made sequential averages in 2020 unrepresentative, the benchmark uses a preceding five-year average that excludes 2020.

We also exclude the impact of the 2017 Mansco acquisition.

Note – Amounts may not foot due to rounding difference.

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

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

As previously addressed, we believe these markets contracted slightly in 2024.

Our manufacturing end markets outperformed 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.

The DSR changes to our manufacturing customers, when compared to the same periods in the prior year, were as follows:

DSR change - manufacturing customers Q1 Q2 Q3 Q4 Annual

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

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

Weakness within our construction end market reflected the ongoing effect of our reduced physical footprint and reduced local inventory tailored to smaller, local contractors.

Weakness within our reseller end market reflected efforts in many industries to reduce channel inventories.

Strength in our transportation end market reflected strong growth with customers who manage large networks or warehouses, who have increased spend with us due to our ability to meet their needs for rapid fulfillment on a large scale.

The DSR changes to our non-manufacturing customers, when compared to the same periods in the prior year, was as follows:

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

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Our products fall into two functional subsets:

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

(1) OEM parts which become part of a customer's finished good and (2) MRO which provide for the maintenance, repair, and ongoing operations of a customer's facility.

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

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

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

From a company perspective, the DSR changes of fasteners, when compared to the same periods in the prior year, were as follows (note:

this information includes all end markets):

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2023 7.0 % 0.0 % -2.0 % -2.3 % 0.7 %

We continued to experience a divergence in the performance of our fastener versus our non-fastener product lines in 2024.

This divergence was due in part to relatively weak performance from our fastener product line.

Fasteners are more heavily oriented toward production of final goods than maintenance, which results in greater susceptibility to periods of weaker industrial production, such as we experienced in 2024.

In addition, due to its greater commodity content and shipping costs, fastener pricing can be more sensitive to cyclical trends.

In 2024, weak business activity did contribute to slightly lower pricing for our fastener products.

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

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

From a company perspective, the DSR changes of non-fasteners, when compared to the same periods in the prior year, were as follows (note:

this information includes all end markets):

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

The MRO orientation of our non-fastener category and our capabilities in vending played the greatest roles in the ability of our non-fastener products to outperform fasteners in 2024.

The gross profit percentage during each period was as follows:

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Our gross profit, as a percentage of net sales, was 45.1% in 2024 and 45.7% in 2023.

This decrease was primarily related to two factors.

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

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

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

These negative effects were partly offset by favorable freight costs, which reflects elevated domestic freight revenue leveraging what are relatively stable costs to support our captive fleet, lower expenses related to external freight providers, and lower fuel costs.

Operating and Administrative Expenses

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

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

The percentage change in employee-related, occupancy-related, and all other operating and administrative expenses compared to the same periods in the preceding year, is outlined in the table below.

Our gross profit percentage was primarily impacted by two 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 product margin pressure.

In safety, over the course of the year we incurred certain costs to support our customers' short-term operations, but also to prepare for incremental volumes that we expect to materialize in 2025.

Other product lines exhibited stability in product margin throughout the year, but did not recover the margin pressure that was experienced in the latter part of 2023 and faced difficult comparisons year-over-year.

These factors were only slightly offset by higher price-cost, which reflects the reversal in the first half of 2024 of the negative price-cost experienced in the first half of 2023.

SG&A Expenses

SG&A expenses, as a percentage of net sales, increased to 25.1% in 2024 from 24.9% in 2023.

We continued to invest in areas, such as Onsite, technology and analytics personnel, and sales-related travel that we view as critical to supporting future growth.

We managed expenses not directly related to customer acquisition and growth more tightly, but the overall level of investment produced negative leverage at the growth rates experienced in 2024.

The 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 Operating and

Administrative Expenses Twelve-month Period

of Total SG&A Expenses Twelve-month Period

Employee-related expenses 70% to 75% 3.2 % 3.4 %

Occupancy-related expenses 15% to 20% 2.1 % 4.2 %

All other operating and administrative expenses 10% to 15% 4.2 % 18.5 %

All other SG&A expenses 10% to 15% 8.1 % 4.2 %

Employee-related expenses include:

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Our employee-related expenses increased in 2024 from 2023.

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

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

This was related to:

higher base pay and employment taxes as a result of increased FTE during the period and moderate wage inflation;

and higher healthcare costs due to growth in the number and size of claims.

These factors were partly offset by a decline in bonuses and a decline in profit sharing reflecting slower sales and profit growth versus the prior year.

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

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Organizational support personnel consists of:

(1) Sales & Growth Driver Support personnel (approximately 35% of category), which includes sourcing, purchasing, supply chain, product development, etc.;

(2) Information Technology personnel (35% to 40% of category);

and (3) Administrative Support personnel (25% to 30% of category), which includes human resources, Fastenal School of Business, accounting and finance, senior management, etc.

(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, FSB, accounting and finance, senior management, etc.

Occupancy-related expenses include:

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This was related to:

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

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

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

All other operating and administrative expenses include:

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

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

and a slight rise in branch rents, which was more evident in 2024 than in preceding years as we are no longer actively reducing our branch locations and the associated costs.

All other SG&A expenses include:

(1) selling-related transportation, (2) 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 2024 from 2023.

This was related to:

higher spending on information technology;

higher general insurance costs;

increased spending on travel and supplies;

and higher bad debt expense.

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

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

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

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

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

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

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

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

selling-related transportation costs were higher reflecting higher lease costs as we refreshed our fleet of pick-ups, which more than offset lower fuel expense;

higher expenses related to Fastenal-sponsored trade events, such as our Customer Expo held in April, and general marketing costs;

higher spending on IT;

and higher general insurance costs.

We had higher interest income reflecting the investment of cash balances into higher earning short-term instruments throughout 2024 as part of a program we began in the fourth quarter of 2023.

We had lower interest expense in 2024.

We carried lower average borrowings relative to 2023 primarily from cash generated from working capital reductions enabling us to reduce outstanding revolver debt under our Credit Facility.

The increase in interest income and the reduction in interest expense resulted in net interest expense of $1.9 in 2024 compared to $6.7 in 2023.

We recorded income tax expense of $357.5 in 2024, or 23.7% of income before income taxes, compared to $367.0 in 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 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 during the year.

Net income, net income per share, the percentage change in net income, and the percentage change in net income per share, were as follows:

Dollar Amounts 2024 2023

Net earnings $ 1,155.0 1,086.9

Basic EPS 2.02 1.89

Diluted EPS 2.02 1.89

Net income $ 1,150.6 1,155.0

Basic net income per share 2.01 2.02

Diluted net income per share 2.00 2.02

Percentage Change 2024 2023

Net earnings 6.3 % 17.5 %

Basic EPS 6.7 % 17.7 %

Diluted EPS 6.7 % 17.8 %

Net income -0.4 % 6.3 %

Basic net income per share -0.6 % 6.7 %

Diluted net income per share -0.6 % 6.7 %

Tax Rate 23.7 % 24.1 %

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

During 2024, net income per share decreased.

Volume growth in 2024 was not sufficient to produce SG&A leverage that could offset mix-related gross margin contraction, resulting in operating margin contraction that was only partially offset by our modest growth in sales, lower net interest expense, and a more favorable tax rate.

Liquidity and Capital Resources

Net Cash Provided by Operating Activities

Net cash provided by operating activities in dollars and as a percentage of net earnings were as follows:

Net cash provided by operating activities in dollars and as a percentage of net income were as follows:

Net cash provided $ 1,173.3 1,432.7

% of net earnings 124.0 % 86.6 %

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

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

% of net income 102.0 % 124.0 %

In 2024, we experienced a decrease in our operating cash flow as a percentage of net income.

The decrease in operating cash flow, as a percent of net income, primarily reflects our operating assets and liabilities being a use of cash in 2024 as compared to a source of cash in 2023.

This was primarily attributable to investing in inventory in 2024 as opposed to reducing inventory in 2023.

Trade Working Capital Assets

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Note – Amounts may not foot due to rounding difference.

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

First, our receivables increased as a result of growth in sales to our customers.

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

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

The increase in our accounts receivable balance in 2024 was primarily attributable to growth in sales to our customers.

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

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

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

In 2023, our inventories decreased, reflecting the absence of supply chain disruptions from the prior year.

Our response at the time was to deepen our inventory as a means of maintaining high service to our customers, particularly for imported inventory.

Dissipation of these disruptions has allowed us to shorten our product ordering cycle.

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

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

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

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

A third factor that tends to require incremental inventory increases over time is our growth drivers, including our FMI offerings, Onsite channel, and international expansion, all of which tend to require significant investments in inventory.

The increase in our inventory balance in 2024 was primarily attributable to three factors.

First, our inventory increased as a result of growth in sales to our customers and the addition of stock to ensure we can support our customers' future growth.

Second, we added $30.0 to $35.0 in stock to improve service to our in-market locations and generate efficiencies in our hubs.

Third, we took advantage of year-end opportunities arising from our suppliers' desire to reduce inventory at year-end.

These factors were partially offset by the effects of soft underlying business activity and modest product cost deflation.

The increase in our accounts payable balance in 2024 was primarily attributable to an increase in our product purchases as reflected in the growth in inventories.

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

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Net Cash Used in Investing Activities

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

Net cash used in investing activities in dollars and as a percentage of net income were as follows:

Net cash used $ 214.5 161.2

% of net earnings 14.0 % 15.0 %

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

% of net income 18.6 % 14.0 %

Our net cash used in investing activities increased in 2024 from 2023.

This increase was primarily related to investments for net capital expenditures.

Property and equipment expenditures typically consist primarily of:

(1) purchases related to industrial vending, (2) purchases of property and equipment related to expansion of and enhancements to distribution centers, (3) spending on software and hardware for our information processing systems, (4) the addition of fleet vehicles, (5) expansion, improvement or investment in certain owned or leased branch properties, and (6) the addition of manufacturing and warehouse equipment.

Proceeds from the sales of property and equipment, typically for the planned disposition of pick-up trucks as well as distribution vehicles and trailers in the normal course of business, are netted against these purchases an d additions.

Set forth below is a recap of our 2023 and 2022 net capital expenditures in dollars and as a percentage of net sales and net earnings:

(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.

Set forth below is a recap of our 2024 and 2023 net capital expenditures in dollars and as a percentage of net sales and net income:

Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities $ 145.8 83.9

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% of net sales 2.8 % 2.2 %

% of net earnings 13.9 % 14.9 %

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

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

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

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

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

% of net income 18.6 % 13.9 %

Our net capital expenditures in 2024 increased when compared to 2023, though they were below our anticipated range of $235.0 to $255.0 for the year.

This was primarily related to two factors.

First, there was less demand to install incremental picking modules in our in-market locations than we anticipated.

Second, spending on FMI hardware was lower, primarily as a result of lower FASTBin signings and installations than anticipated.

For 2025, we expect our investment in property and equipment, net of proceeds from sales, to be within a range of $265.0 to $285.0, an increase from $214.1 in 2024.

This increase reflects three items.

First, we expect elevated IT spending as projects that were planned in 2024, but experienced delays, are now expected to occur in 2025.

Second, we expect higher distribution center spending to complete our upgraded Utah hub, begin construction on a new Atlanta hub, and improve our picking capacity and efficiency across our hub network.

Third, we expect greater outlays for FMI hardware reflecting an increase in our targeted signings.

Net Cash Used in Financing Activities

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

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

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

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

Cash dividends paid $ 893.3 1,016.8

% of net earnings 88.0 % 65.4 %

Purchases of common stock — 237.8

% of net earnings — % 21.9 %

% of net income 77.6 % 88.0 %

Total returned to shareholders $ 893.3 1,016.8

% of net earnings 88.0 % 87.3 %

% of net income 77.6 % 88.0 %

Proceeds from the exercise of stock options $ (39.6) (30.1)

% of net earnings -2.6 % -0.8 %

% of net income -3.4 % -2.6 %

Debt obligations payments (proceeds), net $ 60.0 295.0

% of net earnings 25.5 % -15.2 %

% of net income 5.2 % 25.5 %

Net cash used $ 913.7 1,281.7

% of net earnings 111.0 % 71.3 %

The decrease in net cash used in financing activities reflects two factors.

First, we had lower dividend payments.

While we increased regular dividend payments in 2024 by 11.7%, in the fourth quarter of 2023 we paid a special fifth dividend that did not recur in 2024.

Second, we used less cash to reduce outstanding debt obligations in 2024 than we did in 2023, primarily because we carried lower balances on our Credit Facility throughout 2024.

These uses of cash were only partly offset by an increase in the exercise of stock options.

We declared a quarterly dividend of $0.43 per share on January 16, 2025.

In 2024, we paid aggregate annual dividends per share of $1.56.

In 2023, we paid aggregate annual dividends per share of $1.78, which included $1.40 per share in regular quarterly dividends and a $0.38 per share special dividend paid in December 2023.

Stock Purchases

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

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

We did not purchase any of our common stock in 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.

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

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

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

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

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

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

Our borrowings under the Credit Facility and Master Note Agreement peaked during each quarter of 2024 as follows:

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A discussion of income taxes is contained in Note 7 of the Notes to Consolidated Financial Statements.

Unremitted Foreign Earnings

Unremitted Foreign Income

Approximately $197.5 of cash and cash equivalents were held by non-U.S.

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Effects of Inflation

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

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

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

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

We observed very modest deflationary conditions in 2024, primarily for fasteners.

Most inputs, including steel, energy, and domestic transportation costs, experienced price levels that were stable to slightly down during the year, resulting in sustained slight deflation in our inventory and slightly lower pricing affecting our sales.

However, given the immaterial impact of these changes on our financials, we did not institute any broad pricing actions through 2024.

The primary exception to the modestly deflationary tenor of the marketplace in 2024 was in transportation costs for imported goods, where we experienced inflation in container rates through much of 2024.

We took actions to mitigate these effects in the latter part of the year.

The combined net effect on our gross profit percentage of these trends in cost and price inflation was immaterial in 2024.

PRIOR YEAR RESULTS ENDED 2023

Results of Operations

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

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

Net sales 100.0 % 100.0 %

Gross profit 45.7 % 46.1 %

Operating and administrative expenses 25.2 % 26.0 %

SG&A expenses

24.9 % 25.2 %

Operating income 20.8 % 20.8 %

Net interest expense -0.1 % -0.2 %

Earnings before income taxes 20.6 % 20.1 %

Income before income taxes 20.7 % 20.6 %

Note – Amounts may not foot due to rounding difference.

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

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

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

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

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

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

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

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

This affected two aspects of our growth during the period.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sales by Product Line

From a product standpoint, we have three categories:

fasteners, safety supplies, and other product lines, the latter of which includes eight smaller product categories, such as tools, janitorial supplies, and cutting tools.

The percent of sales in the periods below were as follows:

Fasteners 34.0 % 33.3 %

OEM fasteners 20.1 % 20.4 %

MRO fasteners 12.3 % 13.6 %

Total fasteners 32.4 % 34.0 %

Safety supplies 21.2 % 20.8 %

Other product lines 46.4 % 45.2 %

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

Total non-fasteners 67.6 % 66.0 %

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

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

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

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

Annual Sales Changes, Sequential Trends, and End Market Performance

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In a year where demand is weak, we will tend to have more months that fall short of the benchmark than exceed it.

In both cases, there is a random element that makes it difficult to know how any single month will perform.

In both cases, there is a random element that makes it difficult to know how any single month will perform and puts greater relevance on performance trends over multiple periods.

May June July Aug.

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End Market Performance

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

The DSR changes to our manufacturing customers, when compared to the same periods in the prior year, were as follows:

DSR change - manufacturing customers Q1 Q2 Q3 Q4 Annual

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2022 23.9 % 23.1 % 22.6 % 16.0 % 21.3 %

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

The DSR changes to our non-manufacturing customers, when compared to the same periods in the prior year, was as follows:

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

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Product Performance

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

From a company perspective, the DSR changes of fasteners, when compared to the same periods in the prior year, were as follows (note:

this information includes all end markets):

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2022 24.6 % 21.2 % 18.2 % 9.1 % 18.1 %

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

From a company perspective, the DSR changes of non-fasteners, when compared to the same periods in the prior year, were as follows (note:

this information includes all end markets):

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2022 15.0 % 16.0 % 14.4 % 11.6 % 14.2 %

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

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

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

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

This reflects three things:

The gross profit percentage during each period was as follows:

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2022 46.6 % 46.5 % 45.9 % 45.3 % 46.1 %

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

This decrease was primarily related to three factors.

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

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

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

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

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

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

Operating and Administrative Expenses

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

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

The percentage change in employee-related, occupancy-related, and all other operating and administrative expenses compared to the same periods in the preceding year, is outlined in the table below.

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

This decrease was primarily related to two factors.

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

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

These negative effects were partly offset by favorable freight costs, which reflects elevated domestic freight sales leveraging what are relatively stable costs to support our captive fleet, lower expenses related to external freight providers, and lower fuel costs.

SG&A Expenses

Our SG&A expenses, as a percentage of net sales, improved to 24.9% in 2023 from 25.2% in 2022.

The 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 Operating and

Administrative Expenses Twelve-month Period

of Total SG&A Expenses Twelve-month Period

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

Occupancy-related expenses 15% to 20% 4.2 % 2.6 %

All other operating and administrative expenses 10% to 15% 18.5 % 4.9 %

All other SG&A expenses 10% to 15% 4.2 % 18.5 %

Our employee-related expenses increased in 2023 from 2022.

This was related to:

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

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

and an increase in our profit sharing contribution.

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

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

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

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

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(1) Sales & Growth Driver Support personnel (approximately 35% of category), which includes sourcing, purchasing, supply chain, product development, etc.;

(2) Information Technology personnel (35% to 40% of category);

and (3) Administrative Support personnel (25% to 30% of category), which includes human resources, Fastenal School of Business, accounting and finance, senior management, etc.

(2) IT personnel (35% to 40% of category);

and (3) Administrative Support personnel (25% to 30% of category), which includes human resources, FSB, accounting and finance, senior management, etc.

Our occupancy-related expenses increased in 2023 from 2022.

This was related to:

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

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

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

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

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

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

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

Combined, all other SG&A expenses increased in 2023 from 2022.

This was related to:

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

higher spending on information technology;

higher spending on travel, meals, and supplies;

and higher general insurance expense.

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

Net Interest Expense

higher spending on IT;

higher general insurance costs;

increased spending on travel and supplies;

and higher bad debt expense.

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

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

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

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

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

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

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

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

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

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

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

Net income, net income per share, the percentage change in net income, and the percentage change in net income per share, were as follows:

Dollar Amounts 2023 2022

Net earnings $ 1,086.9 925.0

Basic EPS 1.89 1.61

Diluted EPS 1.89 1.60

Net income $ 1,155.0 1,086.9

Basic net income per share 2.02 1.89

Diluted net income per share 2.02 1.89

Percentage Change 2023 2022

Net earnings 17.5 % 7.7 %

Basic EPS 17.7 % 7.5 %

Diluted EPS 17.8 % 7.4 %

Net income 6.3 % 17.5 %

Basic net income per share 6.7 % 17.7 %

Diluted net income per share 6.7 % 17.8 %

Tax Rate 24.1 % 24.5 %

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

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

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

Liquidity and Capital Resources

Net Cash Provided by Operating Activities

Net cash provided by operating activities in dollars and as a percentage of net earnings were as follows:

Net cash provided by operating activities in dollars and as a percentage of net income were as follows:

Net cash provided $ 1,432.7 941.0

% of net earnings 86.6 % 83.3 %

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

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

% of net income 124.0 % 86.6 %

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

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

Trade Working Capital Assets

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Note – Amounts may not foot due to rounding difference.

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

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

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

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

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