Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements. (Dollar amounts are in thousands except for per share amounts and where otherwise noted.)

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 approximately 2,700 company owned stores. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes both original equipment manufacturers (OEM) and maintenance and repair operations (MRO). The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our product include farmers, truckers, railroads, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our stores and customers are primarily located in North America.

Like most industrial and construction centric organizations, we have endured a roller coaster ride over the last several years. The third quarter of 2008 included the final months of an inflationary period related to both steel prices (between 40% and 50% of our sales consist of some type of fastener – nuts, bolts, screws, etc. – most of which are made of steel) and energy prices (a meaningful item for us given the amount of energy that is necessary in the production of our products and in the transportation of our products across North America).

In the fourth quarter of 2008, and throughout much of 2009, this inflation turned to deflation. When the swings are dramatic, this can hurt our gross margins because we are selling expensive inventory on the shelf at declining prices. This hurt our gross margins in 2009. The drop in energy costs over the same period provided some relief, but it was small in comparison to the impact of deflation. The deflation of 2009 ended and these conditions normalized and allowed our gross margins to recover in 2010 and 2011. (See later discussion on gross margins.)

The discussion that follows includes information regarding our sales growth and our sales by product line during 2012. This information provides a summary view to understand the dynamics of the year. However, we feel the real story is told in the monthly sales change, sequential trend, and end market information that follows – that information explains the real impact of the market dynamics affecting us over this period of uncertainty.

Over the last several years, we have continued to make significant investments in (1) store locations, (2) national accounts, (3) government sales, (4) internal manufacturing support, (5) international operations (now over 10% of our sales), (6) FAST SolutionsSM (industrial vending), (7) product expansion (with particular emphasis on metalworking products and on exclusive brands), (8) additional sales specialists to support safety products, metalworking products, and our manufacturing operations, and (9) additional sales operational support to focus on under performing stores and under performing industrial vending. We are excited about the prospects of each.

As always, the ‘pathway to profit’ is the cornerstone of our business evolution, and it influences everything we do. Remember, our business centers on our 2,700 stores – their individual success leads to the success of the entire organization over time. As always, we will continue to work to complete this task and maintain our goal of Growth through Customer Service.

SALES GROWTH:

Net sales and growth rates in net sales were as follows:

	2012				2011			2010
Net sales	$	3,133,577			2,766,859			2,269,471
Percentage change	13.3		%		21.9	%		17.6	%

The increase in net sales in 2012 came primarily from higher unit sales. Our growth in net sales was impacted by price changes in our products, but the impact was limited. Our growth in net sales was not meaningfully impacted by the introduction of new products or services, but was helped by initiatives such as FAST SolutionsSM (industrial vending). The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. The growth in net sales at the older store locations was hindered by weakness in the industrial production and non-residential construction industries served by our Company. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.1% in 2012.

The increase in net sales in 2011 came primarily from higher unit sales. Our growth in net sales was impacted by price changes in our products, but the impact was limited. Our growth in net sales was not meaningfully impacted by the introduction of new products or services, but was helped by initiatives such as FAST SolutionsSM (industrial vending). The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. The growth in net sales at the older store locations was helped by the moderating impacts of the previous recessionary environment. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar improved our daily sales growth rate by 0.7% in 2011.

The increase in net sales in 2010 came primarily from higher unit sales. Our growth in net sales was not meaningfully impacted by deflationary or inflationary price changes in our products or by the introduction of new products or services. The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. The growth in net sales at the older store locations was due to the moderating impacts of the previous recessionary environment. The increase in net sales also resulted from the strengthening of the Canadian currency relative to the United States dollar and from our Holo-Krome business, which we acquired in December 2009. These two items added approximately 0.6 and 0.5 percentage points, respectively, to our growth in 2010.

The impact of the economy is best reflected in the growth performance of our stores opened greater than ten years ago (store sites opened as follows: 2012 group – opened 2002 and earlier, 2011 group – opened 2001 and earlier, and 2010 group – opened 2000 and earlier) and opened greater than five years ago (store sites opened as follows: 2012 group – opened 2007 and earlier, 2011 group – opened 2006 and earlier, and 2010 group – opened 2005 and earlier). These two groups of stores are more cyclical due to the increased market share they enjoy in their local markets. The stores opened greater than two years ago represent a consistent ‘same store’ view of our business (store sites opened as follows: 2012 group – opened 2010 and earlier, 2011 group – opened 2009 and earlier, and 2010 group – opened 2008 and earlier). The daily sales change for each of these groups was as follows:

Store Age	2012		2011		2010
Opened greater than 10 years	8.1%		15.2%		12.5%
Opened greater than 5 years	9.8%		17.1%		13.0%
Opened greater than 2 years	10.8%		17.9%		14.6%

Note: The age groups above are measured as of the last day of each respective year.

Stores opened in 2012 contributed approximately $24,859 (or 0.8%) to 2012 net sales. Stores opened in 2011 contributed approximately $85,318 (or 2.7%) to 2012 net sales and approximately $27,120 (or 1.0%) to 2011 net sales. The rate of growth in sales of store locations generally levels off after they have been open for five years, and, as stated earlier, the sales generated at our older store locations typically vary more with the economy than do the sales of younger stores.

SALES BY PRODUCT LINE:

The approximate mix of sales from the fastener product line and from the other product lines was as follows:

	2012		2011		2010
Fastener product line	44%		47%		49%
Other product lines	56%		53%		51%

MONTHLY SALES CHANGES, SEQUENTIAL TRENDS, AND END MARKET PERFORMANCE

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

This section focuses on three distinct views of our business – monthly sales changes, sequential trends, and end market performance. The first discussion regarding monthly sales changes provides a good mechanical view of our business based on the age of our stores. The second discussion provides a framework for understanding the sequential trends (that is, comparing a period to the immediately preceding period) in our business. Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.

MONTHLY SALES CHANGES:

All company sales – During the months in 2012, 2011, and 2010, all of our selling locations, when combined, had daily sales growth rates of (compared to the comparable month in the preceding year):

	Jan.			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Nov.			Dec.
2012	21.3	%		20.0	%		19.3	%		17.3	%		13.1	%		14.0	%		12.1	%		12.0	%		12.9	%		6.8	%		8.2	%		9.7	%
2011	18.8	%		21.5	%		22.8	%		23.2	%		22.6	%		22.5	%		22.4	%		20.0	%		18.8	%		21.4	%		22.2	%		21.2	%
2010	2.4	%		4.4	%		12.1	%		18.6	%		21.1	%		21.1	%		24.4	%		22.1	%		23.5	%		22.4	%		17.9	%		20.9	%

The growth in the first three and a half months of 2012 generally continued the relative strength we saw in 2011 and in most of 2010. During 2012 there were two distinct economic slowdowns. The first occurred in the late April/May time frame, and then moderated until September. The second occurred in the October/November time frame. This was exaggerated by an unusual business day comparison in October (23 days in 2012 versus 21 days in 2011 - the maintenance portion of our business is often linked to monthly spend patterns, which are not as business day dependent, this can dilute the daily growth picture given the change in business day divisor) and the impact of Hurricane Sandy. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.1% during 2012 (this lowered our growth in the first, second, and third quarters by 0.1%, 0.4%, 0.2%, respectively and increased our growth in the fourth quarter by 0.2%). This was a sharp contrast to 2011 and 2010, when changes in foreign currencies increased our growth by 0.7% and 0.6%, respectively.

Stores opened greater than two years – Our stores opened greater than two years (store sites opened as follows: 2012 group – opened 2010 and earlier, 2011 group – opened 2009 and earlier, and 2010 group – opened 2008 and earlier) represent a consistent 'same-store' view of our business. During the months in 2012, 2011, and 2010, the stores opened greater than two years had daily sales growth rates of (compared to the comparable month in the preceding year):

	Jan.			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Nov.			Dec.
2012	18.8	%		17.1	%		16.8	%		14.5	%		10.1	%		11.1	%		9.1	%		8.6	%		9.8	%		3.8	%		5.1	%		6.6	%
2011	16.0	%		18.4	%		19.4	%		19.6	%		19.2	%		19.1	%		18.7	%		16.5	%		15.2	%		18.0	%		18.5	%		17.5	%
2010	0.6	%		2.3	%		9.6	%		16.3	%		18.5	%		18.3	%		21.3	%		19.2	%		19.8	%		18.8	%		14.1	%		16.8	%

Stores opened greater than five years – The impact of the economy, over time, is best reflected in the growth performance of our stores opened greater than five years (store sites opened as follows: 2012 group – opened 2007 and earlier, 2011 group – opened 2006 and earlier, and 2010 group – opened 2005 and earlier). This group is more cyclical due to the increased market share they enjoy in their local markets. During the months in 2012, 2011, and 2010, the stores opened greater than five years had daily sales growth rates of (compared to the comparable month in the preceding year):

	Jan.			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Nov.			Dec.
2012	17.4	%		15.8	%		15.7	%		13.7	%		9.0	%		10.2	%		8.3	%		7.9	%		8.5	%		2.6	%		4.6	%		5.6	%
2011	15.3	%		17.9	%		19.2	%		19.1	%		17.9	%		18.2	%		17.3	%		15.2	%		14.5	%		17.0	%		17.4	%		16.9	%
2010	-2.1	%		-0.5	%		7.4	%		14.9	%		17.3	%		16.2	%		19.8	%		18.2	%		18.9	%		17.9	%		13.2	%		16.0	%

SEQUENTIAL TRENDS:

We find it helpful to think about the monthly sequential changes in our business using the analogy of climbing a stairway – This stairway has several predictable landings where there is a pause in the sequential gain (i.e. April, July, and October to December), but generally speaking, climbs from January to October. The October landing then establishes the benchmark for the start of the next year.

History has identified these landings in our business cycle. They generally relate to months with impaired business days (certain holidays). The first landing centers on Easter, which alternates between March and April (Easter occurred in April in 2012, 2011, and 2010), the second landing centers on July 4th, and the third landing centers on the approach of winter with its seasonal impact on primarily our construction business and with the Christmas / New Year holidays. The holidays we noted impact the trends because they either move from month-to-month or because they move around during the week.

The table below shows the pattern to our sequential change in our daily sales. The line labeled 'Past' is an historical average of our sequential daily sales change for the period 1998 to 2003. We chose this time frame because it had similar characteristics, a weaker industrial economy in North America, and could serve as a benchmark for a possible trend line. The '2012', '2011', and '2010' lines represent our actual sequential daily sales changes. The '12Delta', '11Delta', and '10Delta' lines indicate the difference between the 'Past' and the actual results in the respective year.

	Jan.(1)			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Cumulative change from Jan. to Oct.
Past	0.9	%		3.3	%		2.9	%		-0.3	%		3.4	%		2.8	%		-2.3	%		2.6	%		2.6	%		-0.7	%		15.9	%
2012	-0.3	%		0.5	%		6.4	%		-0.8	%		0.5	%		2.5	%		-2.7	%		1.3	%		4.3	%		-4.8	%		7.1	%
12Delta	-1.2	%		-2.8	%		3.5	%		-0.5	%		-2.9	%		-0.3	%		-0.4	%		-1.3	%		1.7	%		-4.1	%		-8.8	%
2011	-0.2	%		1.6	%		7.0	%		0.9	%		4.3	%		1.7	%		-1.0	%		1.4	%		3.4	%		0.7	%		21.7	%
11Delta	-1.1	%		-1.7	%		4.1	%		1.2	%		0.9	%		-1.1	%		1.3	%		-1.2	%		0.8	%		1.4	%		5.8	%
2010	2.9	%		-0.7	%		5.9	%		0.6	%		4.8	%		1.7	%		-1.0	%		3.5	%		4.5	%		-1.5	%		19.0	%
10Delta	2.0	%		-4.0	%		3.0	%		0.9	%		1.4	%		-1.1	%		1.3	%		0.9	%		1.9	%		-0.8	%		3.1	%

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

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

Several observations stand out while viewing the 2012 sequential pattern: (1) The direction of the historical sequential pattern (increased daily sales on a sequential basis in February, March, May, June, August, and September and decreased daily sales on a sequential basis in April and July) has played out each month; however, the cumulative growth in the daily sales from January to October has fallen short of the benchmark figure and of the actual results in 2011 and 2010. (2) The magnitude of the February and May '12Delta' of approximately -2.8% was similar. This fact, as well as the choppiness of the year in general, caused us to approach the year with a conservative tone. (3) The weakness in 2012 was amplified in the first three quarters of the year by changes in foreign currencies (primarily Canada) relative to the U.S. dollar as indicated earlier.

END MARKET PERFORMANCE:

Fluctuations in end market business – The sequential trends noted above were directly linked to fluctuations in our end markets. To place this in perspective – approximately 50% of our business has historically been with customers engaged in some type of manufacturing. The daily sales to these customers grew in the first, second, third, and fourth quarters (when compared to the same quarter in the previous year), and for the year, as follows:

	Q1			Q2			Q3			Q4			Annual
2012	20.3	%		15.8	%		14.0	%		9.7	%		14.9	%
2011	15.5	%		18.5	%		18.3	%		21.0	%		20.0	%
2010	15.7	%		29.8	%		30.6	%		17.7	%		22.4	%

Our manufacturing business consists of two subsets: the industrial production business (this is business where we supply products that become part of the finished goods produced by our customers) and the maintenance portion (this is business where we supply products that maintain the facility or the equipment of our customers engaged in manufacturing). The industrial business is more fastener centered, while the maintenance portion is represented by all product categories.

In the second, third, and fourth quarters of 2012, the decrease in the rate of growth was more pronounced in our industrial production business. This is in sharp contrast to the first quarter of 2012 where the growth was more pronounced in the industrial production business, a trend that had also existed in 2011 and 2010. The first quarter and prior quarters were a direct counter to the 2009 contraction, which was more severe in our industrial production business and less severe in the maintenance portion of our manufacturing business.

The best way to understand the change in our industrial production business is to examine the results in our fastener product line. In the first three months of 2012, the daily sales growth in our fastener product line was approximately 15.4%. This growth dropped to 10.5%, 6.1%, and 8.6% in April, May, and June, respectively, and then averaged 6.0% and 2.6% in the third and fourth quarters, respectively. By contrast, the best way to understand the change in the maintenance portion of the manufacturing business is to examine the results in our non-fastener product lines. In the first three months of 2012, the daily sales growth in our non-fastener business was approximately 25.1%. This dropped to 24.4%, 19.0%, and 19.6% in April, May, and June, respectively, and averaged 18.0% and 13.6% in the third and fourth quarters, respectively. The non-fastener business has demonstrated relative resilience in 2012, when compared to our fastener business and to the distribution industry in general, due to our strong FAST SolutionsSM (industrial vending) program; this is discussed in greater detail later in this document.

The patterns related to the industrial production business, as noted above, are influenced by the movements noted in the Purchasing Manufacturers Index ('PMI') published by the Institute for Supply Management (http://www.ism.ws/), which is a composite index of economic activity in the United States manufacturing sector. The PMI in 2012, 2011, and 2010 was as follows:

	Jan.			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Nov.			Dec.
2012	54.1			52.4			53.4			54.8			53.5			49.7			49.8			49.6			51.5			51.7			49.5			50.7
2011	59.9			59.8			59.7			59.7			54.2			55.8			51.4			52.5			52.5			51.8			52.2			53.1
2010	56.7			55.8			59.3			59.0			58.8			56.0			55.7			57.4			56.4			57.0			58.0			57.3

For background to readers not familiar with the PMI index, it is a monthly indicator of the economic health of the manufacturing sector. Five major indicators that influence the PMI index are new orders, inventory levels, productions, supplier deliveries, and the employment environment. When a PMI of 50 or higher is reported, this indicates expansion in the manufacturing industry compared to the previous month. If the PMI is below 50, this represents a contraction in the manufacturing sector.

Our non-residential construction customers have historically represented 20% to 25% of our business. The daily sales to these customers grew or contracted in the first, second, third, and fourth quarters (when compared to the same quarter in the previous year), and for the year, as follows:

	Q1			Q2			Q3			Q4			Annual
2012	17.1	%		12.7	%		8.2	%		4.2	%		10.3	%
2011	17.7	%		15.8	%		15.8	%		17.4	%		17.1	%
2010	-14.7	%		0.5	%		6.3	%		10.3	%		-0.3	%

We believe the weakness in the economy in the fourth quarter of 2012, particularly in the non-residential construction market, was amplified by the political uncertainty in the United States.

A graph of the sequential daily sales trends to these two end markets in 2012, 2011, and 2010, starting with a base of '100' in the previous October and ending with the next October, would be as follows:

Manufacturing

Non-Residential Construction

GROWTH DRIVERS OF OUR BUSINESS

We grow by continuously adding customers and by increasing the activity with each customer. We believe this growth is enhanced by our close proximity to our customers, which allows us to provide a range of services and product availability that our competitors can't easily match. Historically, we expanded our reach by opening stores at a very fast pace. These openings were initially in the United States, but expanded beyond the United States beginning in the mid 1990's.

In our first ten years of being public (1987 to 1997), we opened stores at a rate approaching 30% per year. In the next ten years, we opened stores at an annual rate of approximately 10% to 15% and, over the last five years, at a rate of approximately 3% to 8% (we currently expect to open approximately 65 to 80 stores in 2013, or approximately 2.5% to 3.0%). As we gained proximity to more customers, we continued to diversify our growth drivers. This was done to provide existing store personnel with more tools to grow their business organically, and the results of this are reflected in our earlier discussion on sales growth at stores opened greater than five years. In the early 1990's, we began to expand our product lines, and we added new product knowledge to our bench. This was our first big effort to diversify our growth drivers. The next step began in the mid to late 1990's when we began to add sales personnel with certain specialties or focus. This began with our National Accounts group in 1995, and, over time, has expanded to include individuals dedicated to: (1) sales related to our internal manufacturing division, (2) government sales, (3) internet sales, (4) specific products (most recently metal working), and (5) FAST SolutionsSM (industrial vending). Another step occurred at our sales locations (this includes Fastenal stores as well as strategic account stores and in-plant locations) and at our distribution centers, and began with a targeted merchandising and inventory placement strategy that included our 'Customer Service Project' approximately ten years ago and our 'Master Stocking Hub' initiative approximately five years ago. This strategy allowed us to better target where to stock certain products (local store, regional distribution center, master stocking hub, or supplier) and allowed us to improve our fulfillment, lower our freight costs, and improve our ability to serve a broader range of customers.

Our FAST SolutionsSM (industrial vending) operation is a rapidly expanding component of our business. We believe industrial vending is the next logical chapter in the Fastenal story; we also believe it has the potential to be transformative to industrial distribution, and that we have a 'first mover' advantage. We are investing aggressively to maximize this advantage. At our investor day in May 2011, we discussed our progress with industrial vending. In addition to our discussion regarding progress, we discussed our goals with the rollout of the industrial vending machines. One of the goals we identified related to our rate of 'machine signings' (the first category below) – our goal was simple, sign 2,500+ machines per quarter (or an annualized run rate of 10,000 machines). In 2012, we hit our annual goal of 10,000 machines during July, and the momentum has continued as we finished the year. We intend to continue our aggressive push with FAST SolutionsSM (industrial vending) and, to this end, have established an internal goal to sign 30,000 machines in 2013, or 2,500 per month rather than per quarter. This is an aggressive goal, but we believe we can hit this run rate during 2013. In addition, during 2012 we developed plans to (1) reinvigorate our fastener growth and to (2) improve the performance (i.e. sales growth) at under-performing locations. These plans centered on expanding our sales team for industrial production business, improving our delivery systems for other fastener business, and expanding the team that supports under-performing stores and districts.

The following table includes some statistics regarding our industrial vending business (note - we added the third category of information in this report to highlight the mix change in the machines deployed as our business expands beyond the flagship FAST 5000 machine):

				Q1			Q2			Q3			Q4		Annual
Number of vending machines in		2012		4,568			4,669			5,334			5,591		20,162
contracts signed during the period1		2011		1,405			2,107			2,246			2,084		7,842
		2010		257			420			440			792		1,909
Cumulative machines installed2		2012		9,798			13,036			17,013			21,095
		2011		2,659			3,867			5,642			7,453
		2010		892			1,184			1,515			1,925
Percent of installed machines that are a FAST 5000		2012		69.7	%		65.9	%		60.6	%		58.0	%
(our most common helix vending machine)		2011		82.6	%		77.5	%		75.0	%		72.5	%
		2010		99.5	%		97.3	%		92.4	%		87.8	%
Percent of total net sales to		2012		17.8	%		20.8	%		23.2	%		25.8	%
customers with vending machines3		2011		8.9	%		10.5	%		13.1	%		15.7	%
		2010		3.4	%		4.6	%		6.1	%		7.5	%
Daily sales growth to customers		2012		33.9	%		34.3	%		32.9	%		28.6	%
with vending machines4		2011		50.6	%		43.9	%		42.5	%		40.7	%
		2010		37.4	%		54.0	%		56.4	%		60.2	%

1	This represents the gross number of machines signed during the quarter, not the number of contracts.

2	This represents the number of machines installed and dispensing product on the last day of the quarter.

3	The percentage of total sales (vended and traditional) to customers currently using a vending solution.

4	The growth in total sales (vended and traditional) to customers currently using a vending solution compared to the comparable period in the preceding year.

PROFIT DRIVERS OF OUR BUSINESS

We grow our profits by continuously working to grow sales and to improve our relative profitability. We also grow our profits by allowing our inherent profitability to shine through – we refer to this as the 'pathway to profit'. The distinction is important.

We achieve improvements in our relative profitability by increasing our gross margin, by structurally lowering our operating expenses, or both. We advance on the 'pathway to profit' by increasing the average store size (measured in terms of monthly sales), and by allowing the changing store mix to improve our profits. This is best explained by comparing the varying profitability of our 'traditional' stores in the table below. The average store size for the group, and the average age, number of stores, and pre-tax earnings data by store size for the fourth quarter of 2012, 2011, and 2010, respectively, were as follows:

Sales per Month		Average Age (Years)			Number of Stores			Percentage of Stores			Pre-Tax Earnings Percentage
Three months ended December 31, 2012											Average store sales = $83,098
$0 to $30,000		4.7			304			11.5	%		-14.4	%
$30,001 to $60,000		7.6			830			31.3	%		12.2	%
$60,001 to $100,000		10.0			759			28.6	%		21.3	%
$100,001 to $150,000		12.9			375			14.1	%		26.0	%
Over $150,000		14.9			272			10.3	%		28.8	%
Strategic Account/Overseas Store					112			4.2	%
Company Total					2,652			100.0	%		20.9	%
Three months ended December 31, 2011											Average store sales = $78,781
$0 to $30,000		3.8			353			13.7	%		-13.7	%
$30,001 to $60,000		7.2			882			34.1	%		11.7	%
$60,001 to $100,000		9.4			680			26.3	%		21.3	%
$100,001 to $150,000		12.0			352			13.6	%		25.9	%
Over $150,000		15.1			227			8.8	%		27.4	%
Strategic Account/Overseas Store					91			3.5	%
Company Total					2,585			100.0	%		20.2	%
Three months ended December 31, 2010											Average store sales = $67,643
$0 to $30,000		3.8			462			18.6	%		-13.2	%
$30,001 to $60,000		6.8			952			38.2	%		12.7	%
$60,001 to $100,000		9.7			573			23.0	%		22.0	%
$100,001 to $150,000		12.2			276			11.1	%		25.2	%
Over $150,000		15.2			152			6.1	%		27.1	%
Strategic Account/Overseas Store					75			3.0	%
Company Total					2,490			100.0	%		18.7	%

Note – Amounts may not foot due to rounding difference.

When we originally announced the 'pathway to profit' strategy in 2007, our goal was to increase our pre-tax earnings, as a percentage of sales, from 18% to 23%. This goal was to be accomplished by slowly moving the mix from the first three categories ($0 to $30,000, $30,001 to $60,000, and $60,001 to $100,000, these groups represented 76.5% of our store base in the first three months of 2007, the last quarter before we announced the 'pathway to profit') to the last three categories ($60,001 to $100,000, $100,001 to $150,000, and over $150,000, these groups represented 53.0% of our store base in the fourth quarter of 2012) and by increasing the average store sales to approximately $125,000 per month. The weak economic environment in 2009 caused our average store size to decrease, and consequently lowered our level of profitability; however, subsequent to 2009 we improved our gross margin and structurally lowered our operating expenses. This improvement allowed us to amplify the 'pathway to profit' and effectively lowered the average store size required to hit our 23% goal. Today we believe we can accomplish our 'pathway to profit' goal with average store sales of approximately $100,000 to $110,000 per month. In the second quarter of 2012 we achieved a pre-tax earnings percentage of 22.2% with average store sales of $89,169 per month.

Note – Dollar amounts in this section are presented in whole dollars, not thousands.

Store Count and Full-Time Equivalent (FTE) Headcount – The table that follows highlights certain impacts on our business of the 'pathway to profit' since its introduction in 2007. Under the 'pathway to profit' we increased both our store count and our store FTE headcount during 2007 and 2008. However, the rate of increase in store locations slowed and our FTE headcount for all types of personnel was reduced when the economy weakened late in 2008. In the table that follows, we refer to our 'store' net sales, locations, and personnel. When we discuss 'store' net sales, locations, and personnel, we are referring to (1) 'Fastenal' stores and (2) strategic account stores. 'Fastenal' stores are either a 'traditional' store, the typical format in the United States or Canada, or an 'overseas' store, which is the typical format outside the United States and Canada. This is discussed in greater detail earlier in this Form 10-K. Strategic account stores are stores that are focused on selling to a group of large customers in a limited geographic market. The sales, outside of our 'store' group, relate to either (1) our in-plant locations, (2) the portion of our internally manufactured product that is sold directly to a customer and not through a store (including our Holo-Krome business acquired in December 2009), or (3) our direct import business.

The breakdown of our sales, the average monthly sales per store, the number of stores at quarter end, the average headcount at our stores during a quarter, the average FTE headcount during a quarter, and the percentage change were as follows for the first quarter of 2007 (the last completed quarter before we began the 'pathway to profit'), for the third quarter of 2008 (our peak quarter before the economy weakened), and for each of the last five quarters:

	Q1 2007			Q3 2008			Q4 2011			Q1 2012			Q2 2012			Q3 2012			Q4 2012
Total net sales reported	$489,157			$625,037			$697,804			$768,875			$804,890			$802,577			$757,235
Less: Non-store sales (approximate)	40,891			57,267			86,737			92,459			98,735			100,124			95,951
Store net sales (approximate)	$448,266			$567,770			$611,067			$676,416			$706,155			$702,453			$661,284
% change since Q1 2007				26.7	%		36.3	%		50.9	%		57.5	%		56.7	%		47.5	%
% change (twelve months)				17.5	%		21.0	%		20.2	%		14.6	%		10.1	%		8.2	%
Percentage of sales through a store	92	%		91	%		88	%		88	%		88	%		88	%		87	%
Average monthly sales per store	$72			$82			$79			$86			$89			$88			$83
(using ending store count)
% change since Q1 2007				13.9	%		9.7	%		19.4	%		23.6	%		22.2	%		15.3	%
% change (twelve months)				9.3	%		16.2	%		16.2	%		11.3	%		6.0	%		5.1	%

	Q1 2007			Q3 2008			Q4 2011			Q1 2012			Q2 2012			Q3 2012			Q4 2012
Store locations - quarter end count	2,073			2,300			2,585			2,611			2,635			2,650			2,652
% change since Q1 2007				11.0	%		24.7	%		26.0	%		27.1	%		27.8	%		27.9	%
% change (twelve months)				7.2	%		3.8	%		3.5	%		3.0	%		3.3	%		2.6	%
Store personnel - absolute headcount	6,849			9,123			10,328			10,486			10,637			10,604			10,347
% change since Q1 2007				33.2	%		50.8	%		53.1	%		55.3	%		54.8	%		51.1	%
% change (twelve months)				17.9	%		14.1	%		12.2	%		9.3	%		5.4	%		0.2	%
Store personnel - FTE	6,383			8,280			8,684			8,900			9,126			9,244			9,035
Non-store selling personnel - FTE	616			599			953			998			1,054			1,066			1,070
Sub-total of all sales personnel - FTE	6,999			8,879			9,637			9,898			10,180			10,310			10,105
Distribution personnel-FTE	1,646			1,904			1,820			1,815			1,881			1,887			1,872
Manufacturing personnel - FTE 1	316			340			516			527			545			544			544
Administrative personnel-FTE	767			805			796			796			794			808			811
Sub-total of non-sales personnel - FTE	2,729			3,049			3,132			3,138			3,220			3,239			3,227
Total - average FTE headcount	9,728			11,928			12,769			13,036			13,400			13,549			13,332
% change since Q1 2007
Store personnel - FTE				29.7	%		36.0	%		39.4	%		43.0	%		44.8	%		41.5	%
Non-store selling personnel - FTE				-2.8	%		54.7	%		62.0	%		71.1	%		73.1	%		73.7	%
Sub-total of all sales personnel - FTE				26.9	%		37.7	%		41.4	%		45.4	%		47.3	%		44.4	%
Distribution personnel-FTE				15.7	%		10.6	%		10.3	%		14.3	%		14.6	%		13.7	%
Manufacturing personnel-FTE 1				7.6	%		63.3	%		66.8	%		72.5	%		72.2	%		72.2	%
Administrative personnel-FTE				5.0	%		3.8	%		3.8	%		3.5	%		5.3	%		5.7	%
Sub-total of non-sales personnel - FTE				11.7	%		14.8	%		15.0	%		18.0	%		18.7	%		18.2	%
Total - average FTE headcount				22.6	%		31.3	%		34.0	%		37.7	%		39.3	%		37.0	%
% change (twelve months)
Store personnel - FTE				15.2	%		14.1	%		13.7	%		10.6	%		7.1	%		4.0	%
Non-store selling personnel - FTE				-2.4	%		33.8	%		28.1	%		24.0	%		15.9	%		12.3	%
Sub-total of all sales personnel - FTE				13.8	%		15.8	%		15.0	%		11.8	%		8.0	%		4.9	%
Distribution personnel-FTE				6.0	%		14.1	%		12.9	%		7.1	%		3.1	%		2.9	%
Manufacturing personnel - FTE 1				1.8	%		16.2	%		14.3	%		10.8	%		6.0	%		5.4	%
Administrative personnel - FTE				7.9	%		7.0	%		4.7	%		1.4	%		-0.4	%		1.9	%
Sub-total of non-sales personnel - FTE				6.0	%		12.5	%		10.9	%		6.2	%		2.7	%		3.0	%
Total - average FTE headcount				11.7	%		15.0	%		14.0	%		10.4	%		6.7	%		4.4	%

1	The distribution and manufacturing headcount was impacted by the addition of 92 employees with the acquisition of Holo-Krome in December 2009.

STATEMENT OF EARNINGS INFORMATION (percentage of net sales) for the periods ended December 31:
		Twelve-month period
		2012			2011			2010
Net sales		100.0	%		100.0	%		100.0	%
Gross profit		51.5	%		51.8	%		51.8	%
Operating and administrative expenses		30.0	%		31.1	%		32.8	%
(Gain) loss on sale of property and equipment		0.0	%		0.0	%		0.0	%
Operating income		21.5	%		20.8	%		19.0	%
Interest income		0.0	%		0.0	%		0.0	%
Earnings before income taxes		21.5	%		20.8	%		19.0	%
Note – Amounts may not foot due to rounding difference.

Gross profit – percentage for 2012 decreased from 2011, but stabilized in the second, third, and fourth quarters of 2012.

The gross profit percentage in the first, second, third, and fourth quarters was as follows:

		Q1			Q2			Q3			Q4
2012		51.3	%		51.6	%		51.6	%		51.6	%
2011		52.0	%		52.2	%		51.9	%		51.2	%
2010		51.1	%		52.1	%		51.8	%		52.0	%

The fluctuations in our gross profit percentages are typically driven by changes in: (1) transactional gross profit, (2) organizational gross profit, and (3) vendor incentive gross profit. The transactional gross profit represents the gross profit realized from the day-to-day fluctuations in customer pricing relative to product and freight costs. The organizational gross profit represents the component of gross profit we attribute to buying scale and efficiency gains. The third component relates to vendor volume allowances. In the short-term, periods of inflation or deflation can influence the first two categories, while sudden changes in business volume can influence the third.

We believe a normal gross profit percentage range for our business is 51% to 53%. This is based on our current mix of products, geographies, end markets, and end market uses (such as industrial production business versus maintenance business). Our business operated below our expected gross profit range at the end of 2009, and expanded into the low end of this range during 2010. In the second quarter of 2010, we moved into the middle of the range as the three components of gross profit improved, the contribution being split fairly evenly between the three components. We remained in the middle of the range until the fourth quarter of 2011. In the fourth quarter of 2011, our gross margin felt pressure and dropped to the lower end of the range. This drop was primarily due to changes in our transactional margin (primarily due to changes in product and customer mix), lower vendor incentive gross profit, and lower freight utilization. The latter two items created half of the gross margin drop and are more of a seasonal issue. In the first quarter of 2012, our gross margin improved nominally over the previous quarter. This was primarily caused by the seasonal improvement of vendor volume allowances as rising fuel prices offset our improvements in freight utilization. In the second, third, and fourth quarters of 2012, our gross margin improved when compared to the first quarter. Most of this improvement related to improvements in our transactional gross margin. The improvement was partially offset by the weakening of our selling prices in certain foreign markets due to changes in the exchange rate. One item of note, in the fourth quarter of 2012 we experienced a drop off in the freight component of our gross margin due to lower freight utilization, a typical pattern due to the seasonal drop off in business; this decline was offset by an improvement in the remaining portion of our transactional gross margin that centers on product transactional cost and customer pricing.

Operating and administrative expenses - improved relative to sales in both 2012 as a whole and the fourth quarter of 2012 versus 2011 as a whole and the fourth quarter of 2011.

Historically, our two largest components of operating and administrative expenses have consisted of employee related expenses (approximately 65% to 70%) and occupancy related expenses (approximately 15% to 20%). The remaining expenses cover a variety of items with selling transportation typically being the largest.

The three largest components of operating and administrative expenses grew as follows for the periods ended December 31 (compared to the comparable periods in the preceding year):

		Twelve-month period
		2012			2011			2010
Employee related expenses		10.1	%		19.7	%		14.6	%
Occupancy related expenses		4.8	%		7.4	%		5.7	%
Selling transportation costs		10.1	%		26.5	%		-0.2	%

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. The increase in 2012 was driven by the following factors: (1) average employee headcount, measured on a full-time equivalent basis, grew 8.7%, (2) sales commissions grew, (3) bonus amounts related to our growth drivers grew (this includes items such as industrial vending bonuses and manager minimum pay adjustments), and (4) our profit sharing contribution grew. The increase in 2011 was driven by the following factors: (1) employee headcount, measured on a full-time equivalent basis, grew 15.0%, (2) sales commissions grew (this increase was amplified by stronger sales growth relative to 2010, which had a meaningful impact on the commission earned, and higher gross profit margins), (3) total bonuses earned increased due to our profit growth, (4) hours worked per employee grew, and (5) our profit sharing contribution grew.

Occupancy related expenses include: (1) building rent and depreciation, (2) building utility costs, (3) equipment related to our stores and distribution locations, and (4) FAST SolutionsSM (industrial vending) equipment (we consider the vending equipment to be a logical extension of our store operation and classify the expense as occupancy). The increase in 2012 was driven by (1) a dramatic increase in the amount of FAST SolutionsSM (industrial vending) equipment as discussed earlier in this document, (2) an increase in the number of locations, and (3) increased investment in our distribution infrastructure over the last several years. Almost all of our occupancy increase in 2012 related to item (4) a dramatic increase in the amount of FAST SolutionsSM (industrial vending) equipment, as our energy savings offset most of the increase relating to items (1) and (3). The energy savings were driven by our efforts to lower energy consumption, a mild winter, and a drop in natural gas prices during the heating season. The increase in 2011 was driven by the same factors noted above with one exception; in 2011 approximately 50% of the increase was due to rising utility costs.

Our selling transportation costs consist primarily of our store fleet as most of the distribution fleet costs are included in the cost of sales. Selling transportation costs included in operating and administrative expenses increased in 2012; however, they increased at a rate less than sales growth. The increase in 2012 was primarily due to elevated fuel prices in the first quarter, and, in the case of the first, second, and third quarters, the impact of the 2011 expansion of our fleet related to additions to our non-store sales personnel, particularly our industrial vending vehicles. The increase in 2011 was primarily related to the increase in per gallon fuel costs discussed below and the expansion of our fleet related to additions to our non-store sales personnel, particularly our industrial vending vehicles. Our selling and transportation costs in the fourth quarter of 2012 were comparable to those in the fourth quarter of 2011 because the per gallon fuel costs only grew nominally and the number of our industrial vending vehicles had normalized. Conversely, the increase in the fourth quarter of 2011 from the fourth quarter of 2010 was driven by the dramatic increase in per gallon fuel costs and the ramp up in the number of our industrial vending vehicles.

The last several years have seen meaningful swings in the cost of diesel fuel and gasoline – During the first, second, third, and fourth quarters of 2012, our total vehicle fuel costs were approximately $10.6, $10.8, $10.8, and $10.3 million, respectively. During the first, second, third, and fourth quarters of 2011, our total vehicle fuel costs were approximately $8.6, $10.5, $9.8, and $9.8 million, respectively. The changes resulted from variations in fuel costs, variations in the service levels provided to our stores from our distribution centers, changes in the number of vehicles at our store locations, and changes in the number of other sales centered vehicles as a result of store openings and the expansion of our non-store sales force. These fuel costs include the fuel utilized in our distribution vehicles (semi-tractors, straight trucks, and sprinter trucks) which is recorded in cost of sales and the fuel utilized in our store delivery and other sales centered vehicles which is included in operating and administrative expenses (the split in the last several years has been approximately 50:50 between distribution and store and other sales centered use).

The average per gallon fuel costs (in actual dollars) and the percentage change (on a year-over-year basis) for the last three years was as follows:

Per gallon average price		Q1				Q2			Q3			Q4			Annual Average1
2012 price
Diesel fuel		$	3.92			3.98			3.88			4.05			3.96
Gasoline		$	3.53			3.73			3.61			3.53			3.60
2011 price
Diesel fuel		$	3.60			4.04			3.90			3.87			3.85
Gasoline		$	3.22			3.78			3.62			3.37			3.50
2010 price
Diesel fuel		$	2.89			3.06			2.96			3.14			3.01
Gasoline		$	2.68			2.80			2.71			2.84			2.76
Per gallon price change		Q1				Q2			Q3			Q4			Annual1
2012 change
Diesel fuel		8.9		%		-1.5	%		-0.5	%		4.7	%		2.9	%
Gasoline		9.6		%		-1.3	%		-0.3	%		4.7	%		2.9	%
2011 change
Diesel fuel		24.6		%		32.0	%		31.8	%		23.2	%		27.9	%
Gasoline		20.1		%		35.0	%		33.6	%		18.7	%		26.8	%

1	Average of the four quarterly figures contained in the table.

Income taxes – Incomes taxes, as a percentage of earnings before income taxes, were approximately 37.6% and 37.8% for 2012 and 2011, respectively. As our international business and profits grow over time, the lower income tax rates in those jurisdictions, relative to the United States, have begun to lower our effective tax rate.

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

Dollar amounts	2012				2011			2010
Net earnings	$	420,536			357,929			265,356
Basic EPS	1.42				1.21			0.90
Diluted EPS	1.42				1.21			0.90
Percentage change	2012				2011			2010
Net earnings	17.5		%		34.9	%		43.9	%
Basic EPS	17.4		%		34.4	%		45.2	%
Diluted EPS	17.4		%		34.4	%		45.2	%

During 2012, the net earnings increase was greater than that of sales primarily due to the effective management of operating expenses and a slightly lower income tax rate. During 2011, the net earnings increase was greater than that of sales primarily due to the effective management of operating expenses and a slightly lower income tax rate. During 2010, the net earnings increase was greater than that of sales primarily due to the previously mentioned factors included in the discussion on the improvements in the gross margin percentage and in the growth in operating expenses which was dramatically less than sales growth.

Operational Working Capital – Operational working capital, which we define as accounts receivable and inventories, are highlighted below. The annual dollar change and the annual percentage change were as follows:

Dollar change	2012				2011
Accounts receivable	$	33,565			68,461
Inventories	69,231				88,783
Operational working capital1	$	102,796			157,244
Annual percentage change	2012				2011
Accounts receivable	9.9		%		25.3	%
Inventories	10.7		%		15.9	%
Operational working capital1	10.4		%		19.0	%

1 For purposes of this discussion, we are defining operational working capital as accounts receivable, net and inventories.

The growth in accounts receivable noted above was driven by our sales growth in the final two months of the period. The strong growth in recent years of our international business and large customer accounts has created some difficulty with managing the growth of accounts receivable relative to the growth in sales. This was exaggerated by the short month in December 2012 versus 2011 (19 business days versus 21 days) and due to a drop off in payment activity due to Christmas Day and New Year's Day falling on a Tuesday resulting in a number of our customers being shut down for the last full week of December. We saw a similar short month impact in September 2012. Also as indicated above, our sales in the last two months of the year grew from 2011 to 2012 by 3.9%; however, our daily sales growth in the last two months of 2012 was 9.1% which resulted in increased year end receivables.

Our growth in inventory balances over time does not have as direct a relationship to our monthly sales patterns as does our growth in accounts receivable. This is impacted by other aspects of our business. For example, the dramatic economic slowdown in late 2008 and early 2009 caused our inventory to spike. This occurred because the lead time for inventory procurement is typically longer than the visibility we have into future monthly sales patterns. Over the last decade, we increased our relative inventory levels due to the following: (1) new store openings, (2) expanded stocking breadth at individual stores, (3) expanded stocking breadth at our distributions centers (for example, our master stocking hub in Indianapolis expanded its product breadth over six fold from 2005 to 2011), (4) expanded direct sourcing, (5) expanded exclusive brands (private label), and (6) expanded FAST SolutionsSM (industrial vending) solutions. Items (4), (5), and (6), plus the impact of strong growth with national accounts and international expansion, created most of our inventory growth in both 2012 and 2011.

As we indicated in earlier communications, our goal is to move the ratio of annual sales to accounts receivable and inventory (Annual Sales: AR&I) back to a better than a 3.0:1 ratio. On December 31, 2012 and 2011, we had a ratio of 2.9:1 and 2.8:1, respectively.

Liquidity and Capital Resources

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

	2012				2011			2010
Net cash provided	$	396,292			268,489			240,488
% of net earnings	94.2		%		75.0	%		90.6	%

The increases in the net cash provided in each of the three years was primarily due to increases in earnings. The lower percentage of the earnings figure in 2011 was primarily due to increases in inventory necessary to support our industrial vending and metalworking initiatives.

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

	2012			2011			2010
Store	56	%		56	%		57	%
Distribution Center	44	%		44	%		43	%
Total	100	%		100	%		100	%

New stores open with the standard store model, which consists of a core stocking level of approximately $50 thousand per location. This inventory level grows as the level of business in a store grows.

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

	2012				2011			2010
Net cash used	$	107,204			112,223			80,048
% of net earnings	25.5		%		31.4	%		30.2	%

The changes in net cash used was primarily related to changes in our net capital expenditures as discussed below. The 2012 figure was partially offset by the liquidation of marketable securities late in the year to help fund our supplemental dividend payment.

Net property and equipment expenditures in dollars and as a percentage of net earnings were as follows:

	2012				2011			2010
Net capital expenditures	$	133,882			116,489			69,138
% of net earnings	31.8		%		32.5	%		26.1	%

The net capital expenditures increased over the three years. The increases were primarily caused by the dramatic increase in the number of FAST SolutionsSM (industrial vending) machines deployed in our business.

Property and equipment expenditures in 2012, 2011, and 2010 consist of: (1) purchase of software and hardware for Fastenal’s information processing systems, (2) addition of certain pickup trucks, (3) purchase of signage, shelving, and other fixed assets related to store openings, (4) addition of manufacturing and warehouse equipment, (5) expansion or improvement of certain owned or leased store properties, (6) expansion of Fastenal’s distribution/trucking fleet, (7) cost related to the expansion of our Indianapolis, Indiana master distribution center (2010), (8) cost of a new manufacturing facility for our Holo-Krome business in Wallingford, Connecticut (2010), (9) purchases related to FAST SolutionsSM (industrial vending), which primarily consists of automated vending equipment, and (10) cost related to the expansion of our Winona, Minnesota distribution center (2012 and 2011). Disposals of property and equipment consist of the planned disposition of certain pick-up trucks, semi-tractors, and trailers in the normal course of business, and the disposition of real estate relating to several store locations.

Set forth below is an estimate of our 2013 net capital expenditures and a recap of our 2012, 2011, and 2010 net capital expenditures.

	2013				2012			2011			2010
Net capital expenditures	(Estimate)				(Actual)			(Actual)			(Actual)
Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities	$	159,300			105,278			83,607			50,822
Shelving and related supplies for store openings and for product expansion at existing stores	6,200				5,240			5,259			4,298
Data processing software and equipment	10,500				11,102			12,036			7,347
Real estate and improvements to store locations	4,500				6,014			5,157			1,740
Vehicles	9,900				10,772			13,984			9,390
Proceeds from sale of property and equipment	(3,900		)		(4,524	)		(3,554	)		(4,459	)
	$	186,500			133,882			116,489			69,138

We anticipate funding our current expansion plans with cash generated from operations, from available cash and cash equivalents, and from our borrowing capacity. Because of the considerable cash required in 2013 for expanding our FAST SolutionsSM (industrial vending) and increasing the use of automation in our distribution centers, together with the large dividend payout late in 2012, we established a $125,000 unsecured credit facility in December 2012, to provide additional cash flow in that month and in 2013 and 2014. In addition to opening new stores in the United States, we plan to continue opening additional stores in our foreign markets. As of year end, we had no material outstanding commitments for capital expenditures.

We have future commitments for facilities and equipment and for vehicles at year end. The facility and vehicle amounts primarily consist of future lease payments. The expected future cash obligations related to the commitments are as follows:

	Total				2013			2014 & 2015			2016 & 2017			After 2017
Facilities and equipment	$	225,973			87,942			107,085			30,946			—
Vehicles	33,452				18,962			14,490			—			—
Total	$	259,425			106,904			121,575			30,946			—

Net Cash Used in Financing Activities – Net cash used in financing activities in dollars and as a percentage of net earnings were as follows:

	2012				2011			2010
Net cash used	$	327,513			181,819			182,814
% of net earnings	77.9		%		50.8	%		68.9	%

The fluctuations are due to changes in the level of our dividend payments. This amount was partially offset by the exercise of stock options by our employees in 2012 and 2011. These items in dollars and as a percentage of earnings were as follows:

	2012				2011			2010
Dividends	$	367,306			191,741			182,814
% of net earnings	87.3		%		53.6	%		68.9	%
Stock purchases	—				—			—
% of net earnings	—		%		—	%		—	%
Total returned to shareholders	$	367,306			191,741			182,814
% of net earnings	87.3		%		53.6	%		68.9	%
Proceeds from the exercise of stock options	(29,644		)		(8,939	)		—
% of net earnings	(7.0		)%		(2.5	)%		—
Net impact to cash used	$	337,662			182,802			182,814
% of net earnings	80.3		%		51.1	%		68.9	%

Stock Repurchase— We did not purchase any stock in 2012, 2011, or 2010. As of February 7, 2013, we have authority from our board of directors to purchase up to 1,800,000 shares of our common stock.

Dividends — We declared a dividend of $0.10 per share on January 16, 2013. We paid aggregate annual dividends per share of $1.24, $0.65, and $0.62 in 2012, 2011, and 2010, respectively.

Line of Credit — A description of our credit facility is contained in Note 10 of the 'Notes to Consolidated Financial Statements'. The description of our credit facility in Note 10 is incorporated herein by reference.

Effects of Inflation— We noted minimal price changes in 2012 and 2011.

Critical Accounting Policies— Our estimates related to certain assets and liabilities are an integral part of our consolidated financial statements. These estimates are considered critical because they require subjective and complex judgments.

Allowance for doubtful accounts – This reserve is for accounts receivable balances that are potentially uncollectible. The reserve is based on an analysis of customer accounts and our historical experience with accounts receivable write-offs. The analysis includes the aging of accounts receivable, the financial condition of a customer or industry, and general economic conditions. Historically, results have reflected the reserves previously recorded. We believe the results could be materially different if historical trends do not reflect actual results or if economic conditions worsen for our customers.

Inventory reserve – This reserve is for potentially obsolete inventory and shrinkage. The reserve is based on an analysis of inventory trends. The analysis includes inventory levels, sales information, physical inventory counts, cycle count adjustments, and the on-hand quantities relative to the sales history for the product. Historically, results have reflected the reserves previously recorded. We believe the results could be materially different if historical trends do not reflect actual results.

Health insurance reserve – This reserve is for incurred but not reported and reported and unpaid health claims. The reserve is based on an analysis of external data related to our historical claim reporting trends. Historically, results have reflected the reserves previously recorded. We believe the results could be materially different if historical trends do not reflect actual results.

General insurance reserve – This reserve is for general claims related to workers’ compensation, property and casualty losses, and other self-insured losses. The reserve is based on an analysis of external data related to our historical general claim trends. Historically, results have reflected the reserves previously recorded. We believe the results could be materially different if historical trends do not reflect actual results.

Tax strategies – Our effective income tax rate is based on income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. We establish income tax reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions if challenged may or may not result in us prevailing. If we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the largest amount that is greater than 50 percent likely of being realized upon settlement. We presume that all tax positions will be examined by a taxing authority with full knowledge of all relevant information. We regularly monitor our tax positions and tax liabilities. We re-evaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or reverse a previously recorded tax benefit, when (i) there is a completion of a tax audit, (ii) there is a change in applicable tax law including a tax case or legislative guidance, or (iii) there is an expiration of the statute of limitations. Significant judgment is required in accounting for tax reserves. Although we believe that we have adequately provided for liabilities resulting from tax assessments by taxing authorities, positions taken by these tax authorities could have a material impact on our effective income tax rate in future periods.

Legal reserves – Occasionally we are involved in legal matters. The outcomes of these legal matters are not within our complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages that could require significant expenditures. We record a liability for these legal matters when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. Although we believe we have adequately provided for probable losses from litigation, the ultimate outcome of litigation could be materially different from reserves recorded.

New Accounting Pronouncements

A description of new accounting pronouncements is contained in Note 13 of the ‘Notes to Consolidated Financial Statements'. The description of the new accounting pronouncements in Note 13 is incorporated herein by reference.

Proposed Accounting Pronouncements

A description of proposed accounting pronouncements is contained in Note 13 of the ‘Notes to Consolidated Financial Statements’. The description of the proposed accounting pronouncements in Note 13 is incorporated herein by reference.

Geographic Information

Information regarding our revenues and long-lived assets by geographic area is contained in Note 8 of the ‘Notes to Consolidated Financial Statements’. Risks related to our foreign operations are described earlier in this Form 10-K under the heading ‘Certain Risks and Uncertainties’ and ‘Item 1A. Risk Factors’.