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 three-month periods ended March 31, 2025 and 2024 . Three-month Period 2025 2024 Change Net sales $ 1,959.4 1,895.1 3.4 % Business days 63 64 Daily sales $ 31.1 29.6 5.0 % Gross profit $ 883.9 861.6 2.6 % % of net sales 45.1 % 45.5 % SG&A expenses $ 490.0 471.4 3.9 % % of net sales 25.0 % 24.9 % Operating income $ 393.9 390.2 0.9 % % of net sales 20.1 % 20.6 % Income before income taxes $ 393.1 389.8 0.8 % % of net sales 20.1 % 20.6 % Net income $ 298.7 297.7 0.3 % Diluted net income per share $ 0.52 0.52 0.2 % 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. 13 Table of Contents The table below summarizes our absolute and full time equivalent (FTE; based on 40 hours per week) employee headcount, number of branch locations, number of $50K+ customer sites, and weighted Fastenal Managed Inventory (FMI) devices at the end of the periods presented and the percentage change compared to the end of the prior periods. Change Since: Change Since: Q1 2025 Q4 2024 Q4 2024 Q1 2024 Q1 2024 Selling personnel - absolute employee headcount (1) 16,995 16,669 2.0 % 16,726 1.6 % Selling personnel - FTE employee headcount (1) 15,236 15,014 1.5 % 15,064 1.1 % Total personnel - absolute employee headcount 24,181 23,702 2.0 % 23,695 2.1 % Total personnel - FTE employee headcount 21,339 20,958 1.8 % 20,935 1.9 % Number of branch locations 1,587 1,597 -0.6 % 1,592 -0.3 % Number of $50K+ customer sites 2,502 2,330 7.4 % 2,340 6.9 % Weighted FMI devices (MEU installed count) 129,996 126,957 2.4 % 115,653 12.4 % (1) In the fourth quarter of 2024, we realigned certain employees as a result of a routine review of our organizational structure. While there is no change to total absolute or total FTE headcount, it produces minor shifts between headcount categories. Historical numbers have been adjusted to reflect this realignment. During the last twelve months, we increased our total FTE employee headcount by 404. Our total FTE selling and sales support personnel increased by 172. This increase reflects additions of FTE to support growth in our Onsite locations, partially offset by a reduction of personnel at our branch locations reflecting both shifts to Onsite locations and tight management of headcount given sluggish business conditions. We had an increase in our distribution and transportation FTE personnel of 98 to support increased product throughput at our distribution facilities. We had an increase in our remaining FTE personnel of 134 which related primarily to personnel investments in manufactur ing, quality control, IT, and business analytics. 14 Table of Contents FIRST QUARTER OF 2025 VERSUS FIRST QUARTER OF 2024 Results of Operations The following table sets forth condensed consolidated statements of income information (as a percentage of net sales) for the periods ended March 31: Three-month Period 2025 2024 Net sales 100.0 % 100.0 % Gross profit 45.1 % 45.5 % SG&A expenses 25.0 % 24.9 % Operating income 20.1 % 20.6 % Net interest expense 0.0 % 0.0 % Income before income taxes 20.1 % 20.6 % Note – Amounts may not foot due to rounding difference. Sales The table below sets forth net sales and daily sales for the periods ended March 31, and changes in such sales from the prior period to the more recent period: Three-month Period 2025 2024 Net sales $ 1,959.4 1,895.1 Percentage change 3.4 % 1.9 % Business days 63 64 Daily sales $ 31.1 29.6 Percentage change 5.0 % 1.9 % Daily sales impact of currency fluctuations -0.5 % 0.0 % Net sales increased $64.3, or 3.4%, in the first quarter of 2025 when compared to the first quarter of 2024. There was one less selling day in the first quarter of 2025 relative to the prior year period and, taking this into consideration, our net daily sales increased 5.0% in the first quarter of 2025 compared to the first quarter of 2024. This was helped by the absence of Good Friday in March of 2025. Excluding these effects, results reflected contribution from improved customer contract signings over the past twelve months, which was partially offset by sluggish underlying business activity. C hanges in foreign exchange rates negatively affected sales in the first quarter of 2025 by approximately 50 basis points as compared to having an immaterial impact in the first quarter of 2024. We experienced an increase in unit sales in the first quarter of 2025. This was due to a growth in the number of customer sites spending $10K or more per month with Fastenal and, to a lesser degree, growth in average monthly sales per customer site across all customer spend categories. The impact of product pricing on net sal es was not material in the first quarter of 2025 and 2024. Price levels remained relatively stable in the first quarter of 2025. 15 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. With industrial production still sluggish in the first quarter of 2025, the performance of our fastener product line continued to lag ou r non-fastener product lines. The fastener category experienced growth in the first quarter of 2025 after seven consecutive flat or declining quarters . This was driven by easier comparisons and increased contribution from large customer signings. We achieved growth in our safety category reflecting the lower volatility of PPE demand, which tends to be utilized in more MRO than OEM applications, growth of our vending installed base, and success with warehousing and data center customers. Other produ ct lines experienced growth from MR O-oriented lines, such as electrical and janitorial, rather than from OEM-oriented lines, such as cutting tools and welding/abrasives, reflecting continued soft manufacturing demand. 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 2025 2024 2025 2024 OEM fasteners 3.9 % -4.0 % 19.4 % 19.6 % MRO fasteners -3.3 % -5.1 % 10.9 % 11.9 % Total fasteners 1.1 % -4.4 % 30.3 % 31.5 % Safety supplies 7.1 % 8.3 % 22.0 % 21.6 % Other product lines 6.7 % 3.9 % 47.7 % 46.9 % Total non-fasteners 6.8 % 5.2 % 69.7 % 68.5 % From an end market standpoint, we have four categories: heavy manufacturing, other manufacturing, non-residential construction, and other, the latter of which includes reseller, government/education, and transportation/warehousing. Our manufacturing end markets outperformed prim arily due to the relative strength we are experiencing with key account customers with significant managed spend where our service model and technology are particularly impactful. This disproportionately benefits manufacturing customers. Other end market sales were favorably impacted by growth with warehousing and storage, and data center customers, which was partially offset by declining sales with resellers. 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 2025 2024 2025 2024 Heavy manufacturing 4.8 % 2.7 % 43.4 % 43.4 % Other manufacturing 9.7 % 2.5 % 33.0 % 31.6 % Total manufacturing 6.8 % 2.6 % 76.4 % 75.0 % Non-residential construction -3.4 % -6.6 % 7.8 % 8.5 % Other end markets 0.8 % 3.9 % 15.8 % 16.5 % Total non-manufacturing -0.6 % 0.0 % 23.6 % 25.0 % From a customer standpoint, we have two categories: contracts, which include national multi-site, local and regional, and government customers with significant revenue potential, and non-contracts, which include all other customers. Sales with our contract customers continue to outperform as we realize incremental sales from implementing strong customer signings that we have achieved over the last 12 months, which was partially offset by subdued business activity. Non-contract customers tend to be smaller and utilize fewer of our tools and capabilities, providing fewer avenues for share gains and therefore more closely reflect business trends, which remain sluggish. 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 2025 2024 2025 2024 Contract sales 8.5 % 7.2 % 73.1 % 70.6 % Non-contract sales -3.6 % -8.8 % 26.9 % 29.4 % 16 Table of Contents Supplemental Data Prior to 2025, our disclosed metrics primarily addressed development of capabilities, including branch openings, geographic expansion, growth of national accounts, growth of non-fastener products, FMI installations, and Onsite signings, to name a few. The data provided in the chart below measures the number of customer sites that are served throughout our in-market network, categorizing them by monthly customer spend categories and end market, and the sales and average sales per site. We believe this supplemental information may be useful to investors in evaluating Fastenal's business trends and whether and to what degree we are being successful, and we intend to disclose this information quarterly going forward until management determines otherwise. Historical end market sales have been updated in the table below to categorize by customer site and may not be able to be recalculated due to the rounding of those dollar values. The prior three years of quarterly customer site data can be found at the end of this document. Three-month period 2025 Three-month period 2024 Customer Sites (#) (1) (2) Sales Mo. Sales per Customer Site (3) Customer Sites (#) (1) (2) Sales Mo. Sales per Customer Site (3) Manufacturing $50K+/Mo. (4) 2,114 $ 874.0 $ 137,811 1,987 $ 819.2 $ 137,427 $10K+/Mo. 8,500 1,293.1 50,710 8,263 1,230.0 49,619 $5K-$10K/Mo. 4,451 95.5 7,152 4,448 95.3 7,142 <$5K/Mo. 30,308 101.7 1,119 31,999 104.7 1,091 Other sales (5) — 2.7 — — 11.1 — Total manufacturing sales 43,259 $ 1,493.0 $ 11,484 44,710 $ 1,441.1 $ 10,661 Non-manufacturing $50K+/Mo. (4) 388 $ 136.6 $ 117,354 353 $ 116.0 $ 109,537 $10K+/Mo. 2,918 288.5 32,956 2,890 265.7 30,646 $5K-$10K/Mo. 2,749 58.2 7,057 2,888 60.8 7,018 <$5K/Mo. 52,118 109.7 702 59,156 116.3 655 Other sales (5) — 10.0 — — 11.2 — Total non-manufacturing sales 57,785 $ 466.4 $ 2,633 64,934 $ 454.0 $ 2,273 Total $50K+/Mo. (4) 2,502 $ 1,010.6 $ 134,639 2,340 $ 935.1 $ 133,205 $10K+/Mo. 11,418 1,581.6 46,173 11,153 1,495.7 44,702 $5K-$10K/Mo. 7,200 153.8 7,120 7,336 156.2 7,097 <$5K/Mo. 82,426 211.4 855 91,155 221.0 808 Other sales (5) — 12.6 — — 22.2 — Total net sales 101,044 $ 1,959.4 $ 6,422 109,644 $ 1,895.1 $ 5,694 (1) Customer sites represent the number of customer locations served by our in-market network. Individual customers with multiple locations across multiple in-market locations will have multiple customer sites. (2) Customer sites are an average of the number of customer sites calculated each month. (3) Monthly sales per customer site totals do not include the sales from other sales lines, as there is no customer site count associated with it. This column is not rounded to the millions and represents the exact dollar amount. (4) $50K+ customer sites are disclosed as a representation of Onsite-like customers and are also a subset of $10K+ customer sites. (5) Other sales represent impacts to sales that are not tied to a specific site or in-market location. This includes certain service fees, cash sales, direct product sales, etc. 17 Table of Contents FMI Technology comprises our FASTStock ℠ (scanned stocking locations), FASTBin ® (infrared, RFID, and scaled bins), and FASTVend ® (vending devices) offerings. FASTStock's fulfillment processing technology is not embedded, is relatively less expensive and highly flexible in application, and is 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. We signed 6,418 weighted FASTBin and FASTVend devices in the first quarter of 2025. Our goal for weighted FASTBin and FASTVend device signings in 2025 remains between 28,000 to 30,000 M EUs. The table below summarizes signings and installations of our FMI devices and sales through our FMI devices, eBusiness (1) tools, and Digital Footprint (2) . Three-month Period 2025 2024 DSR Change (3) Weighted FASTBin/FASTVend signings (MEUs) 6,418 6,726 -4.6 % Signings per day 102 105 Weighted FASTBin/FASTVend installations (MEUs; end of period) 129,996 115,653 12.4 % FASTStock sales $ 239.1 239.8 1.3 % % of sales 12.1 % 12.5 % FASTBin/FASTVend sales $ 619.9 556.9 13.1 % % of sales 31.3 % 29.0 % FMI sales $ 859.0 796.7 9.5 % FMI daily sales $ 13.6 12.4 % of sales 43.3 % 41.5 % eBusiness sales $ 607.6 549.3 12.9 % % of sales 30.7 % 28.6 % Less: eBusiness and FMI sales overlap $ 258.6 210.6 24.8 % % of sales 13.1 % 11.0 % Digital Footprint sales $ 1,208.0 1,135.4 8.3 % % of sales 61.0 % 59.2 % (1) Our eBusiness includes eProcurement activities, which are integrated transactions, including electronic data interchange (EDI), and eCommerce (transactional website sales). (2) Digital Footprint is a combination of our sales through FMI (FASTStock, FASTBin, and FASTVend) plus that portion of our eBusiness sales that does not represent billings of FMI services. (3) Weighted FASTBin/FASTVend signings and installations reflects the percent change compared to the same period in the prior year. Gross Profit Our gross prof it, as a percentage of net sales, decreased to 45.1% in the first quarter of 2025 from 45.5% in the first quarter of 2024. Our gross profit percentage was primarily impacted by three factors. First, customer and product mix diluted our gross profit percentage. This reflects relatively stronger growth from large customers, including Onsite-like 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 fleet and transportation costs due to inflation in vehicle costs as we cycle our fleet and in third-party freight costs. Third, the aforementioned negative effects on our gross profit percentage were partly offset by increases in supplier incentives due to expanding spend with key suppliers. 18 Table of Contents SG&A Expenses Our SG&A expenses, as a percentage of net sales, were 25.0% in the first quarter of 2025 versus 24.9% in the first quarter of 2024. Our ability to leverage was impacted by having one less selling day in the first quarter of 2025 as compared to the first quarter of 2024, as operating expenses are not managed around monthly selling days. We also experienced growth in SG&A of 3.9% in the first quarter of 2025 versus net sales growth of 3.4% in the same period. 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 2025 Employee-related expenses 70% to 75% 2.3 % Occupancy-related expenses 15% to 20% 6.3 % All other SG&A expenses 10% to 15% 10.4 % 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 first quarter of 2025, our employee-relate d expenses increased when com pared to the first quarter of 2024. We experienced a modest increase in employee base pay due to higher average FTE and, to a lesser degree, higher average wages during the period, as well as higher health insurance costs. This was partly offset by lower incentive pay and profit sharing expense versus the first quarter of 2024. The table below summarizes our FTE headcount at the end of the periods presented and the percentage change compared to the end of the prior periods: Change Since: Change Since: Q1 2025 Q4 2024 (1) Q4 2024 Q1 2024 (1) Q1 2024 Selling personnel (2) 15,236 15,014 1.5 % 15,064 1.1 % Distribution/Transportation personnel 3,111 2,997 3.8 % 3,013 3.3 % Manufacturing personnel 957 936 2.2 % 888 7.8 % Organizational support personnel (3) 2,035 2,011 1.2 % 1,970 3.3 % Total personnel 21,339 20,958 1.8 % 20,935 1.9 % (1) In the fourth quarter of 2024, we realigned certain employees as a result of a routine review of our organizational structure. While there is no change to total absolute or total FTE headcount, it produces minor shifts between headcount categories. Historical numbers have been adjusted to reflect this realignment. (2) Of our Selling Personnel, 80%-85% are attached to a specific in-market location. (3) Organizational support personnel consists of: (1) Sales Support personnel (37% to 42% 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 first quarter of 2025, our occupancy-related expenses increased when compared to the first quarter of 2024. This was primarily a result of increases in a number of cost categories, including general inflation in branch rental costs and utilities, incremental depreciation and other costs associated with hub investments and upgrades, and slightly higher depreciation from an increase in the installed base of FMI hardware. 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. 19 Table of Contents Combined, all other SG&A expenses increased in the first quarter of 2025 when compared to the first quarter of 2024. Selling-related transportation costs were higher, reflecting higher lease costs as we refreshed our fleet of pick-ups, which were partially offset by lower fuel expense. We had relatively smaller increases in bad debt expense, IT expenses, sales-related travel expense, and realized losses on currency conversion, which were partially offset by increases in joint marketing efforts with our suppliers. Operating Income Our operating income, as a percentage of net sales, decreased to 20.1% in the first quarter of 2025 from 20.6% in the first quarter of 2024. Net Interest We ha d lower interest income reflecting a reduction in capital being invested in higher-earning short-term instruments during the period. We had lower interest expense as a result of slightly lower borrowings through the first quarter of 2025. The greater reduction in interest income relative to interest expense resulted in our generating net interest expens e of $0.8 in the first quarter of 2025, compared to $0.4 in the first quarter of 2024. Income Taxes We recorded income tax expense of $94.4 in the first quarter of 2025, or 24.0% of income before income taxes. Income tax expense was $92.1 in the first quarter of 2024, or 23.6% of income before income taxes. We believe our ongoing tax rate, absent any discrete tax items or broader changes to tax law, will be approximately 24.5%. Our tax rate in the first quarter of 2025 and the first quarter of 2024 was below our expected ongoing tax rate due to the tax benefits associated with the exercise of stock options during each period. Net Income Our net income during the first quarter of 2025 was $298.7, an increase of 0.3% compared to the first quarter of 2024. Our diluted net income per share was $0.52 in the first quarter of 2025, compared to $0.52 in the first quarter of 2024. Liquidity and Capital Resources Cash flow activity was as follows for the periods ended March 31: Three-month Period 2025 2024 Change Net cash provided by operating activities $ 262.2 335.6 -21.8 % % of net income 87.8 % 112.7 % Net cash used in investing activities $ 53.8 48.4 11.3 % % of net income 18.0 % 16.3 % Net cash used in financing activities $ 235.5 267.4 -11.9 % 20 Table of Contents Net Cash Provided by Operating Activities Net cash provided by operating activities decreased $73.1 in the first quarter of 2025 when compared to the first quarter of 2024. T he decrease in operating cash flow, as a percent of net income, primarily reflects our operating assets and liabilities being a more significant use of cash in the first quarter of 2025 as compared to a modest use of cash in the first quarter of 2024. The dollar and percentage change in accounts receivable, net, inventories, and accounts payable as of March 31, 2025 when compared to March 31, 2024 were as follows: March 31 Twelve-month Dollar Change Twelve-month Percentage Change 2025 2024 2025 2025 Accounts receivable, net $ 1,278.7 1,213.2 $ 65.5 5.4 % Inventories 1,673.9 1,496.3 177.5 11.9 % Trade working capital $ 2,952.6 2,709.5 $ 243.0 9.0 % Accounts payable $ 341.1 276.0 $ 65.1 23.6 % Trade working capital, net $ 2,611.5 2,433.5 $ 177.9 7.3 % Net sales in last three months $ 1,959.4 1,895.1 $ 64.3 3.4 % Note - Amounts may not foot due to rounding difference. The increase in our accounts receivable balance in the first quarter of 2025 was primarily attributable to growth in sales with our customers, including relative growth with larger customers that tend to carry longer payment terms. The increase in our inventory balance in the first quarter of 2025 was primarily attributable to three factors. First, we added inventory to support projected growth in our business and, to a lesser extent, the anticipated impact of tariffs. Second, our inventory increased as a result of growth in sales with certain customers and the addition of stock to ensure we can support their future growth. Third, we added inventory to support our fastener expansion and optimal package quantity initiatives, which are intended to improve service to our in-market locations and generate efficiencies in our hubs. The increase in our accounts payable balance in the first quarter of 2025 was primarily attributable to an increase in our product purchases as reflected in the growth in inventor ies. Net Cash Used in Investing Activities Net cash used in investi ng activities increased $5.5 in the first quarter of 2025 when compared to the first quarter of 2024. This was due to an increase in purchases of property and equipment in the first quarter of 2025 compared to the first quarter of 2024. 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 and additions. During the first quarter of 2025, our net capital expenditures (purchases of property and equipment, net of proceeds from sales of property and equipment) were $53.8, which was a slight increase from $48.3 in the first quarter of 2024. This was primarily related to an increase in spending for facility construction and upgrades, FMI hardware to support growth in our installed base, IT and manufacturing. Cash requirements for capital expenditures were satisfied from cash generated from operations, available cash and cash equivalents, our borrowing capacity, and the proceeds of disposals. For 2025, we continue to expect our net capital expenditures 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 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. Second, we expect elevated IT spending as projects that were expected in 2024 experienced delays and will occur in 2025. Third, we expect greater outlays for FMI hardware reflecting an increase in our targeted signings. 21 Table of Contents Net Cash Used in Financing Activities Net cash used in financin g activities decreased $31.8 in the first quarter of 2025 when compared to the first quarter of 2024. In the first quarter of 2024, we had higher average borrowings outstanding and were using capital to reduce those balances. In contrast, in the first quarter of 2025, we had lower average borrowings and none 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 quarter of 2025 relative to the first quarter of 2024. This was partly offset by an increase in capital returned to shareholders through dividends in the period. During the first quarter of 2025, we returned $246.7 to our shareholders in the form of dividends, compared to the first quarter of 2024 when we returned $223.2 to our shareholders in the form of dividends. We did not repurchase any of our common stock in either period. We have authority to purchase up to 6,200,000 shares of our common stock under the July 12, 2022 authorization. This authorization does not have an expiration date. Total debt on our balance sheet was $200.0 at the end of the first quarter of 2025, or 5.1% of total capital (the sum of stockholders' equity and total debt). This compares to $200.0, or 5.5% of total capital, at the end of the first quarter of 2024. The lack of additional debt in the first quarter of 2025 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 ob ligations 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 2024 annual report on Form 10-K. An overview of our cash dividends paid or declared in 2025 and 2024 is contained in Note 3 of the Notes to Condensed Consolidated Financial Statements. 22 Table of Contents Critical Accounting Policies and Estimates – A discussion of our critical accounting policies and estimates is contained in our 2024 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, 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, increased competition in FMI, 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, 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.