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Item 7. Management’s Discussion and Analysis

2026-02-05 compared with 2025-02-06 · 163 added, 437 removed, 271 unchanged (69% of the section changed)

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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 consolidated financial statements and should be read in conjunction with those consolidated financial statements.

This section of this Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons for the current year and the prior year.

Discussions of 2022 items can be found in 'Management's Discussion and Analysis of Financial Condition and Results of Operations' in Part II, Item 7 of our annual report on Form 10-K for the fiscal year ended December 31, 2023.

This section of the Form 10-K generally discusses 2025 and 2024 items and year-to-year comparisons between the years.

Discussions of 2023 comparisons can be found in our 2024 Annual Report filed with the SEC.

Business and Operational Overview

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 3,600 in-market locations.

Fastenal is a global leader in the wholesale distribution of industrial and construction supplies.

We distribute these supplies through a network of approximately 1,600 branch locations.

Our largest end market is manufacturing.

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.

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.

Sales to these customers include products for both direct materials, where our products are consumed in the final products of our customers, and indirect materials, where our products are consumed to support the facilities and ongoing operations of our customers.

Geographically, our selling locations and customers are primarily located in North America, though we continue to grow our non-North American presence as well.

It is helpful to appreciate several aspects of our marketplace:

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Second, many of the products we sell are individually inexpensive, but the cost and time to manage, procure, and transport these products can be quite meaningful.

Third, many customers prefer to reduce their number of MRO and OEM suppliers to simplify their business, while also utilizing various technologies and models (including our local branches when they need something quickly or unexpectedly) to improve availability and reduce waste.

Third, many customers prefer to reduce their number of indirect and direct suppliers to simplify their business, while also utilizing various technologies and models (including our local branches when they need something quickly or unexpectedly) to improve availability and reduce waste.

Lastly, we believe the markets are efficient.

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By doing these things every day, Fastenal remains a growth-centric organization.

The global economy continues to experience elevated levels of volatility and uncertainty, including within the commodity, labor, and transportation markets, driven by a combination of geopolitical developments and macroeconomic factors.

Recent imposition of new and expanded tariffs have further contributed to disruptions in global capital markets and global supply chains.

These developments may impact our operations, financial condition, and results of operations.

We are actively monitoring economic conditions in the U.S.

and internationally, including the potential ramifications of evolving trade policies, changes in interest rates, foreign currency exchange rate fluctuations, inflationary pressures, and the risk of a global or regional economic recession.

In response to these factors, we have implemented various strategies designed to mitigate certain adverse effects of changing inflationary conditions and supply chain challenges, while continuing to maintain market price competitiveness and price/cost neutrality.

Historically, our broad and diverse customer base combined with our ability to innovate with our customers have provided a degree of resilience during periods of economic contraction in the industrial market.

However, the ultimate impact of ongoing macroeconomic conditions, including recent tariff-related developments, remains uncertain and cannot be predicted at this time.

Executive Overview

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2025 2024 YOY

Change 2022 YOY

Net sales $ 8,200.5 7,546.0 8.7 %

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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.

Market conditions were sluggish in our key markets in 2025.

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

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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.

Industrial Production increased 1.2% in the first 11 months of 2025 over 2024.

In 2025, the market provided minimal contribution, tariff related pricing contributed 170 to 200 basis points, and the primary factor contributing to our daily sales growth of 9.1% was share gains.

In 2025, our growth was the result of improved customer contract signings with large key account customers and fastener products.

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

In a fluid tariff environment, our gross profit was well managed.

We improved our profitability, which resulted in higher incentive compensation and we invested in technology solutions to drive efficiency;

however, we leveraged our SG&A expenses resulting in a 20 basis point improvement in operating margin.

Asset efficiency improved from the preceding year and we generated good cash flow.

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

based on 40 hours per week) employee headcount, our investments related to in-market locations (defined as the sum of the total number of branch locations and the total number of active Onsite locations), and weighted FMI devices at the end of the periods presented and the percentage change compared to the end of the prior period.

based on 40 hours per week) employee headcount, number of branch locations, number of customer sites summarized by monthly spend band, and weighted FMI devices at the end of the periods presented and the percentage change compared to the end of the prior period.

2024 Twelve-month

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Selling personnel - FTE employee headcount (1)

15,439 15,014 2.8 %

Total personnel - absolute employee headcount 24,489 23,702 3.3 %

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Number of branch locations 1,595 1,597 -0.1 %

Number of active Onsite locations 2,031 1,822 11.5 %

Number of in-market locations 3,628 3,419 6.1 %

Number of $50k+ customer sites 2,657 2,330 14.0 %

Number of $10k+ customer sites 11,712 10,837 8.1 %

Number of $5k-$10k customer sites 7,067 6,948 1.7 %

Number of <$5k customer sites 73,357 82,650 -11.2 %

Weighted FMI devices (MEU installed count) 136,638 126,957 7.6 %

In the fourth quarter of 2024, we realigned certain employees as a result of a routine review of our organizational structure.

While there was no change to total absolute or total FTE headcount, it produced 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 644.

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.

Our total FTE selling personnel increased by 425 to support growth and sales initiatives to target customer acquisition.

We had an increase in our distribution and transportation FTE personnel of 59 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.

Twelve-month Period

Branch openings 11 10

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.

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.

W e had an increase in our remaining FTE personnel of 160, which related primarily to personnel investments in IT, quality control, and supply chain support.

CURRENT YEAR RESULTS ENDED 2025

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Operating income 20.2 % 20.0 %

Net interest expense 0.0 % -0.1 %

Net interest 0.0 % 0.0 %

Income before income taxes 20.2 % 20.0 %

Note – Amounts may not foot due to rounding difference.

Note – Amounts may not foot due to rounding.

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

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Daily sales impact of currency fluctuations 0.0 % -0.1 %

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 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.

The increase in net sales noted above for 2025 was primarily due to higher unit sales of Direct (OEM/Production) materials, Indirect (MRO/Facilities Maintenance) materials, and construction supplies.

We believe higher unit sales in 2025 were primarily a result of our ability to gain market share, as most measures of industrial activity were flat to slightly up throughout the period.

Despite this challenging environment, in 2025 we produced net sales growth of 8.7% and, owing to one less selling day in the period, daily sales growth of 9.1%.

We estimate the disruption to operations and logistics from severe winter weather in January 2025, while meaningful in the month of January, was not material to net sales for the full year of 2025.

Changes in product pricing resulted in 170 to 200 basis points of growth in net sales in 2025.

We effectively increased the penetration of key growth initiatives in 2025, 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 (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:

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 %

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.

Fi rst, we signed 25,892 FMI MEUs, meeting our goal of 25,000 to 26,000 MEU.

Our installed base of FMI MEUs was 136,638 at the end of 2025, an increase of 7.6% over th e end of 2024.

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

This measure reached 62.4% in December 2025.

This was below our goal at the start of 2025, which was between 66% and 68%, attributable to lower volume through our FMI devices due to the business disruption associated with a rapidly changing tariff environment.

Even so, it improved from the prior year level of 60.4% reflecting increasing internal and external adoption of our digital resources.

We expect that during 2026 we will achieve 66% of our sales volume running through our Digital Footprint.

Lastly, we achieved meaningful growth in both our average spend per customer site and the number of customer sites spending $5k or more per month.

From a product portfolio standpoint, we classify our offerings into three primary categories:

fasteners, safety supplies, and other product lines.

The 'other product lines' category encompasses eight smaller product segments, including tools, janitorial supplies, and cutting tools.

Prior to the fourth quarter of 2025, our fastener reporting focused on the segmentation of original equipment manufacturing (OEM) and maintenance, repair, and operations (MRO) fasteners.

In 2024, we enhanced our analytical capabilities through significant investments in our customer master data management system, which has enabled us to deliver more granular insights into our customer site performance starting in 2025.

With continued investment in these improvements throughout 2025, starting in the fourth quarter of 2025, we are able to share a more comprehensive breakdown of our direct (OEM/production) business and our indirect (MRO/facilities maintenance) business.

This extends beyond fasteners to include a broader range of product categories and gives more accurate insights into our product sales.

Direct materials are products that become incorporated into a finished good or directly support a customer's production processes.

This category includes items such as production fasteners, cutting tools, abrasives, certain types of non-fasteners, hardware, and other goods essential to manufacturing throughput.

Indirect materials support customers' facility operations, maintenance, and safety needs but are not directly traceable to a finished good.

These include fasteners, maintenance tools, safety solutions, janitorial supplies, and other items that sustain facility uptime and operational continuity.

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

DSR Change Twelve-month

2025 2024 2025 2024

Direct fasteners/hardware 9.8 % -1.8 % 20.7 % 20.6 %

Direct cutting tools and abrasives 10.2 % 3.9 % 5.2 % 5.2 %

Direct non-fasteners/hardware 12.0 % 6.7 % 12.8 % 12.4 %

Total direct materials 10.6 % 1.6 % 38.7 % 38.2 %

Indirect fasteners/hardware 8.9 % -4.5 % 9.8 % 9.8 %

Indirect safety 9.4 % 7.0 % 21.5 % 21.4 %

Indirect non-fasteners/hardware & non-safety 8.1 % 2.0 % 30.0 % 30.6 %

Total indirect materials 8.7 % 2.6 % 61.3 % 61.8 %

Direct materials growth outpaced overall company growth, driven by improved availability, expanded contract penetration, and the successful implementation of new programs with large manufacturing customers that benefits direct materials more heavily oriented toward production of final goods.

Increased adoption of our tailored production‑line solutions contributed meaningfully to mix improvement and strengthened our position with customers.

Indirect materials growth improved, supported by ongoing demand for safety and facility‑maintenance solutions.

Our digital tools and inventory management programs continued to enhance customer efficiency and contributed to improved performance in this category, led by safety which benefited from growth with warehousing customers who are strong consumers of personal protective equipment.

Annual Sales Changes, Sequential Trends, and End Market Performance

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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.

Note – Amounts may not foot due to rounding difference.

Note – Amounts may not foot due to rounding.

A graph of the sequential daily sales change patterns discussed above, starting with a base of '100' in the previous October and ending with the next October, would be as follows:

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We estimate approximately 71% to 76% 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.

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.

The manufacturing environment remained sluggish in 2025.

O ur 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.

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We estimate approximately 24% to 29% of our business is with customers engaged in a wide range of activities, none of which individually constitute 10% of sales.

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

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

This includes non-residential construction, reseller, transportation, warehouse and storage, data centers, and g overnment/education customers.

Our construction end market experienced growth starting in the second quarter of 2025 and reflected increased adoption of our solutions.

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.

Our transportation end market growth moderated during the year but continued to reflect share gains with customers who manage large networks or warehouses.

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

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2024 0.0 % -1.0 % -1.5 % -0.3 % -0.7 %

Product Performance

Our products fall into two functional subsets:

(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 changes of fasteners, when compared to the same periods in the prior year, were as follows (note:

this information includes all end markets):

DSR change - fasteners Q1 Q2 Q3 Q4 Annual

2024 -4.4 % -3.0 % -4.0 % -1.4 % -3.3 %

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

this information includes all end markets):

DSR change - non-fasteners Q1 Q2 Q3 Q4 Annual

2024 5.2 % 4.2 % 4.7 % 4.3 % 4.6 %

2023 10.3 % 9.2 % 7.5 % 6.6 % 8.4 %

Our non-fastener business is not immune to the impact of industrial cycles, but because it is more dependent on whether a facility is operating than how much product that facility is producing, it does tend to exhibit less volatility in its growth than our fastener business.

We also expect growth of our non-fastener products to outperform growth of our fastener products over the course of a cycle.

This reflects three things:

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 45.0% in 2025 and 45.1% in 2024.

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.

Our fastener expansion project and other supplier-focused initiatives offset the gross margin headwind of a continued shift toward larger customers, which typically generate higher volume at lower gross margins.

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.

SG&A expenses, as a percentage of net sales, decreased to 24.8% in 2025 from 25.1% in 2024.

We continued to invest in areas such as role specialization, technology, 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, which allowed us to leverage SG&A expenses in 2025.

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.

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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.

improvement in our sales and profitability generating significantly higher bonuses and commissions;

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

higher employment taxes;

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

and an increase in profit sharing expense reflecting improved 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:

Twelve-month Period

2025 2024 (1)

Selling personnel (2)

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Total personnel 3.1 % 1.1 %

Of our Selling Personnel, 80%-85% are attached to a specific in-market location.

In the fourth quarter of 2024, we realigned certain employees as a result of a routine review of our organizational structure.

While there was no change to total absolute or total FTE headcount, it produced minor shifts between headcount categories.

Historical numbers have been adjusted to reflect this realignment.

Of our Selling Personnel, 80%-85% are attached to a specific selling location.

Organizational support personnel consists of:

(1) Sales & Growth Driver Support personnel (35% to 40% of category), which includes sourcing, purchasing, supply chain, product development, etc.;

(1) Sales Support personnel (37% to 42% of category), which includes sourcing, purchasing, supply chain, product development, etc.;

(2) IT personnel (34% to 39% of category);

and (3) Administrative Support personnel (22% to 27% of category), which includes human resources, FSB, accounting and finance, senior management, etc.

and (3) Administrative Support personnel (22% to 27% of category), which includes HR, FSB, 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).

(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 operations and classify the depreciation and repair costs as occupancy expenses).

Our occupancy-related expenses increased in 2025 from 2024.

This was related to:

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

inflation in branch rent expense, increased FMI depreciation as the number of installed devices increased;

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

and an increase in property taxes.

All other SG&A expenses include:

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Combined, all other SG&A expenses increased in 2025 from 2024.

This was related to:

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.

This was related to the following increases:

higher spending on IT, increased sales expense associated with signing and im plementing customer sites, and selling-related transportation costs increased and were only partially offset by lower fuel expense.

The increases were partially offset by increases in shared marketing initiatives with our suppliers and lower general insurance costs.

Interest income slightly increased in 2025 and we had lower interest expense in 2025.

We carried lower average borrowings relative to 2024 primarily from cash generated from higher net earnings enabling us to reduce outstanding revolver debt under the Credit Facility.

The slight increase in interest income and the reduction in interest expense resulted in net interest expense of $0.7 in 2025 compared to $1.9 in 2024.

We recorded income tax expense of $396.6 in 2025, or 24.0% of income before income taxes.

Income tax expense was $357.5 in 2024, or 23.7% 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:

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Tax Rate 24.0 % 23.7 %

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.

During 2025, net income per share increased.

Volume growth in 2025 was sufficient to produce SG&A leverage that could offset mix-related gross margin contraction, resulting in operating margin expansion.

Liquidity and Capital Resources

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

Five-Year Average (1)

Net cash provided $ 1,083.8 $ 1,295.9 1,173.3

% of net income 104.8 % 103.0 % 102.0 %

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.

(1) Five-year average includes 2020 to 2024.

In 2025, we experienced a slight increase in our operating cash flow as a percentage of net income.

The increase in operating cash flow, as a percent of net income, primarily reflects our operating assets and liabilities being a slightly less use of cash in 2025 as compared to 2024.

This was attributable to an increase in accounts receivable reflecting increased sales activity, partially offset by a lower investment in inventory at the end of the period.

Trade Working Capital Assets

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Net sales in last three months $ 2,027.4 202.9 11.1 %

Note – Amounts may not foot due to rounding difference.

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

Note – Amounts may not foot due to rounding.

Th e increase in our accounts receivable balance in 2025 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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A significant proportion of our products, particularly fasteners, are sourced from Asia and transported primarily by ship and rail to our North American network for sale.

This requires us to purchase a meaningful quantity of our products months in advance of those products being available for sale in our North American facilities.

This requires us to purchase a meaningful quantity of our products months in advance of those products being available for sale in our North American facilities and the cost of these products can be meaningfully impacted by changes in tariffs.

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 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.

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

The increase in our inventory balance in 2025 was primarily attributable to four 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.

Second, we added stock to improve service to our selling 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.

Fourth, incremental tariffs enacted in 2025 meaningfully increased the cost of certain inventory.

The increase in our accounts payable balance in 2025 was primarily attributable to an increase in our product purchases as reflected in the growth in inventories.

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

Five-Year Average (1)

Net cash used $ 193.8 $ 231.0 214.5

% of net income 19.3 % 18.4 % 18.6 %

(1) Five-year average includes 2020 to 2024.

Our net cash used in investing activities increased in 2025 from 2024.

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

Property and equipment expenditures typically consist primarily of:

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.

2 unchanged sentences

Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities $ 160.1 145.8

Shelving and related supplies for in-market location openings and for product expansion at existing in-market locations 23.5 24.0

Shelving and related supplies for selling location openings and for product expansion at existing selling locations 27.3 23.5

Data processing software and equipment 34.7 25.5

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% of net income 18.3 % 18.6 %

(1) Amounts may not foot due to rounding.

Our net capital expenditures in 2025 increased when compared to 2024, 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.

The increase in capital spend from 2024 primarily related to an incr ease in spending for FMI hardware to support growth in our installed base and IT.

We were below our anticipated range due to delayed projects that are expected to resume in 2026.

Our five-year average of investment in property and equipment, as a percentage of net sales is 2.5%.

For 2026, we expect our investment in property and equipment, net of proceeds from sales, to be within a range of $310.0 to $330.0, an increase from $230.6 in 2025.

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.

The expected growth on a year-to-year basis reflects three items.

First, we expect increased spending to replace our Atlanta hub facility and improve our picking capacity and efficiency across our hub network.

Second, we expect increased trucking spend.

Third, we expect elevated IT spending as projects that were expected in 2025 experienced delays and are expected to continue throughout 2026.

Net Cash Used in Financing Activities

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Net cash used $ 1,054.9 913.7

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.

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

First, we had higher dividend payments.

We increased regular dividend payments in 2025 by 12.4%.

Sec ond, we used more cash to reduce outstanding debt obligations in 2025 than we did in 2024.

These uses of cash were only partly offset by a decrease in the exercise of stock options.

We declared a quarterly dividend of $0.240 per share on January 16, 2026.

In 2025, we paid aggregate annual dividends per share of $0.875.

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.

In 2024, we paid aggregate annual dividends per share of $0.780.

Stock Purchases

We did not purchase any of our common stock in 2025 or 2024.

We have authority to purchase up to 6,200,000 additional shares of our common stock under the July 12, 2022 authorization.

We have authority to purchase up to 12,400,000 shares of our common stock under the July 12, 2022 authorization.

This authorization does not have an expiration date.

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.

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 the Credit Facility and our Master Note Agreement historically.

Our borrowings under the Credit Facility and Master Note Agreement peaked during each quarter of 2025 as follows:

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As of December 31, 2025, we had loans outstanding under the Master Note Agreement of $125.0.

Descriptions of our Credit Facility and Master Note Agreement are contained in Note 9 of the Notes to Consolidated Financial Statements.

Descriptions of the Credit Facility and Master Note Agreement are contained in Note 9 of the Notes to Consolidated Financial Statements.

Material Cash Requirements

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In addition, we may have liabilities for uncertain tax positions but we do not believe any of these liabilities will be material.

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

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

Unremitted Foreign Income

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Effects of Inflation

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 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 %

SG&A expenses

24.9 % 25.2 %

Operating income 20.8 % 20.8 %

Net interest expense -0.1 % -0.2 %

Income before income taxes 20.7 % 20.6 %

Note – Amounts may not foot due to rounding difference.

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

Net sales $ 7,346.7 6,980.6

Percentage change 5.2 % 16.1 %

Business days 253 254

Daily sales $ 29.0 27.5

Percentage change 5.7 % 15.7 %

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

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%.

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%.

Sales by Product Line

From a product standpoint, we have three categories:

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

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 %

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

This section focuses on three distinct views of our business – annual sales changes by month, sequential trends, and end market performance.

The first discussion regarding sales changes by month provides a good mechanical view of our business.

The second discussion provides a framework for understanding the sequential trends (that is, comparing a month to the immediately preceding month, and also looking at the cumulative change from an earlier benchmark month) in our business.

Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.

Annual Sales Changes, by Month

During the months noted below, all of our selling locations, when combined, had a DSR change of (compared to the same month in the preceding year):

May June July Aug.

2023 11.2 % 9.6 % 6.8 % 7.8 % 5.2 % 4.7 % 3.7 % 3.6 % 5.0 % 1.9 % 3.8 % 5.3 %

2022 14.9 % 21.3 % 19.1 % 20.3 % 17.6 % 16.0 % 18.1 % 16.1 % 13.7 % 13.6 % 10.2 % 8.0 %

Sequential Trends

The table below shows the pattern to the sequential change in our daily sales.

The line labeled 'Benchmark' is a historical average of our sequential daily sales change for the trailing five year average that excludes 2020.

We have excluded 2020 from the average as the effects of the pandemic created unusual sequential patterns that we do not consider representative of normal trends.

We believe this time frame serves to show the historical pattern and could serve as a benchmark.

The '2023' and '2022' lines represent our actual sequential daily sales changes.

The '23Delta' and '22Delta' lines indicate the difference between the 'Benchmark' and the actual results in the respective year.

Under normal circumstances, the sequential trends shown below are directly linked to fluctuations in our end markets.

Further, in any given month it is possible to get significant deviation from the benchmark.

It is important to note that these benchmarks are historical averages.

In a year where demand is strong, our daily sales growth rates will tend to have more months that exceed the benchmark than fall below it.

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 and puts greater relevance on performance trends over multiple periods.

May June July Aug.

Benchmark (2)

0.2 % 1.5 % 3.8 % -0.5 % 2.7 % 2.0 % -3.1 % 2.9 % 3.6 % -1.9 % 11.2 %

2023 -0.4 % 1.7 % 1.0 % -0.2 % 0.7 % -0.2 % -2.6 % 1.3 % 4.0 % -3.0 % 2.3 %

23Delta -0.6 % 0.1 % -2.9 % 0.2 % -2.0 % -2.1 % 0.5 % -1.6 % 0.4 % -1.1 % -8.8 %

2022 1.7 % 3.1 % 3.6 % -1.2 % 3.2 % 0.2 % -1.6 % 1.3 % 2.7 % -0.1 % 11.7 %

22Delta 1.5 % 1.6 % -0.2 % -0.7 % 0.6 % -1.7 % 1.5 % -1.6 % -0.9 % 1.8 % 0.5 %

The January figures represent the percentage change from the previous October, whereas the remaining figures represent the percentage change from the previous month.

The benchmark for each month is the average of the previous five years for that month.

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.

A graph of the sequential daily sales change patterns discussed above, starting with a base of '100' in the previous October and ending with the next October, would be as follows:

End Market Performance

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

2023 14.4 % 10.4 % 6.2 % 4.7 % 8.9 %

2022 23.9 % 23.1 % 22.6 % 16.0 % 21.3 %

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

2023 -3.7 % -5.3 % -1.3 % 0.9 % -2.4 %

2022 6.9 % 6.9 % 1.0 % -0.8 % 3.5 %

Product Performance

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):

DSR change - fasteners Q1 Q2 Q3 Q4 Annual

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

2022 24.6 % 21.2 % 18.2 % 9.1 % 18.1 %

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):

DSR change - non-fasteners Q1 Q2 Q3 Q4 Annual

2023 10.3 % 9.2 % 7.5 % 6.6 % 8.4 %

2022 15.0 % 16.0 % 14.4 % 11.6 % 14.2 %

The gross profit percentage during each period was as follows:

Q1 Q2 Q3 Q4 Annual

2023 45.7 % 45.5 % 45.9 % 45.5 % 45.7 %

2022 46.6 % 46.5 % 45.9 % 45.3 % 46.1 %

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.

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 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.

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 SG&A expenses compared to the same periods in the preceding year, is outlined in the table below.

Approximate Percentage

of Total SG&A Expenses 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 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 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:

Twelve-month Period

Selling personnel (1)

Distribution/Transportation personnel 4.2 % 8.4 %

Manufacturing personnel 0.1 % 12.4 %

Organizational support personnel (2)

Total personnel 4.4 % 8.3 %

Of our Selling Personnel, 80%-85% are attached to a specific in-market location.

Organizational support personnel consists of:

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

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 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 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 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 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 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 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 income were as follows:

Net cash provided $ 1,432.7 941.0

% 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

The following table sets forth the dollar and percentage change in accounts receivable, net, inventories, and accounts payable for the period ended December 31:

Dollar Change Twelve-month

Percentage Change

2023 2023 2023

Accounts receivable, net $ 1,087.6 74.4 7.3 %

Inventories 1,522.7 (185.3) -10.8 %

Trade working capital $ 2,610.3 (110.9) -4.1 %

Accounts payable $ 264.1 9.2 3.6 %

Trade working capital, net $ 2,346.2 (120.1) -4.9 %

Net sales in last three months $ 1,758.6 63.0 3.7 %

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.

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.

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

Selling locations 64 % 58 %

Distribution center and manufacturing locations 36 % 42 %

Total 100 % 100 %

Net Cash Used in Investing Activities

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

Net cash used $ 161.2 163.0

% of net income 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.

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 income:

Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities $ 83.9 97.8

Shelving and related supplies for in-market location openings and for product expansion at existing in-market locations 24.0 21.5

Data processing software and equipment 33.4 30.6

Real estate and improvements to branch locations 7.0 12.4

Vehicles 24.5 11.5

Purchases of property and equipment 172.8 173.8

Proceeds from sale of property and equipment (12.2) (11.4)

Net capital expenditures 160.6 162.4

% of net sales 2.2 % 2.3 %

% of net income 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.

Net Cash Used in Financing Activities

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

Cash dividends paid $ 1,016.8 711.3

% of net income 88.0 % 65.4 %

Purchases of common stock — 237.8

% of net income — % 21.9 %

Total returned to shareholders $ 1,016.8 949.1

% of net income 88.0 % 87.3 %

Proceeds from the exercise of stock options $ (30.1) (9.2)

% of net income -2.6 % -0.8 %

Debt obligations payments (proceeds), net $ 295.0 (165.0)

% of net income 25.5 % -15.2 %

Net cash used $ 1,281.7 774.9

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.

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.

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 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.

Our borrowings under the Credit Facility and Master Note Agreement peaked during each quarter of 2023 as follows:

Peak borrowings 2023

First quarter $ 565.0

Second quarter 470.0

Third quarter 350.0

Fourth quarter 330.0

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 inflationary conditions in 2025, primarily related to the implementation of incremental tariffs on imported products.

Steel and aluminum products and derivatives had the highest increases.

We implemented pricing actions to address the incremental tariffs beginning in the second quarter of 2025.

T he combined net effect on our gross profit percentage of these trends in cost and price inflatio n was immaterial in 2025.

Critical Accounting Estimates

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Our most critical accounting estimates include the following:

Allowance for Credit Losses – This reserve is for accounts receivable balances that are potentially uncollectible.

The allowance for credit losses is based on an income statement approach which adjusts the ending balance sheet to take into consideration expected losses over the contractual lives of the receivables, considering factors such as historical data as a basis for future expected losses.

If business or economic conditions change, our estimates and assumptions may be adjusted as deemed appropriate.

Historically, actual required reserves have not varied materially from estimated amounts and our estimation and assumption methods have not materially changed during 2024.

Inventory valuation – Adjustments to the valuation of inventory are based on an analysis of inventory trends including reviews of inventory levels, sales information, and the on-hand quantities relative to the sales history for the product.

Our methodology for estimating whether adjustments are necessary is continually evaluated for factors including significant changes in product demand, market conditions, condition of the inventory, or liquidation value.

If business or economic conditions change, our estimates and assumptions may be adjusted as deemed appropriate.

Historically, actual required adjustments have not varied materially from estimated amounts and our estimation and assumption methods have not materially changed during 2024.

General insurance reserves – These reserves are for general claims related to workers' compensation, property and casualty losses, and other general liability self-insured losses.

The reserves are based on an analysis of reported claims and claims incurred but not yet reported related to our historical claim trends.

We perform ongoing reviews of our insured and uninsured risks and use this information to establish appropriate reserve levels.

We analyze historical trends, claims experience, and loss development patterns to ensure the appropriate loss development factors are applied to the incurred costs associated with the claims made.

Historically, actual required reserves have not varied materially from estimated amounts and our estimation and assumption methods have not materially changed during 2024.

Inventory valuation – We record inventory at the lower of cost or net realizable value.

We record valuation adjustments for excess, slow-moving, and obsolete inventory that are equal to the difference between the cost and estimated net realizable value for that inventory.

Valuation adjustments are estimated using an evaluation of product demand, market conditions, condition of the inventory, or liquidation value.

As the inventory valuation requires significant judgment, we deem it a critical accounting estimate.

Historically, actual valuation adjustments have not varied materially from estimated amounts.

We do not believe there is a reasonable likelihood of a material change in the estimates or assumptions we used to value our inventory in 2025.

General insurance reserves – We record reserves for general claims related to workers' compensation, property and casualty losses, and other general liability self-insured losses.

These reserves are based on reported claims and estimated claims incurred but not yet reported, using historical claim trends, loss development patterns, management’s understanding of current environment and economic factors, and data provided by external specialists and insurance carriers.

We update annual booking rates using historical claims data and reassess the reserve throughout the year.

As the estimation of insurance reserves requires significant judgment, we deem it a critical accounting estimate.

Historically, actual reserve adjustments have not varied materially from estimated amounts.

We do not believe there is a reasonable likelihood of a material change in the estimates or assumptions we use to value our insurance reserves in 2025.

Recently Issued and Adopted Accounting Pronouncements

1 unchanged sentence

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What changed 10-K

Item 7. Management’s Discussion and Analysis