Fastenal (FAST) 10-K risk factor changes: FY2013 vs FY2012

A downturn in the economy [added: or in the principal markets served by us] and other factors may affect customer spending, which could harm our operating results.

A downturn in either the national or local economy where our stores [removed: operate] [added: operate,] or [added: in the principal markets served by us, or] changes in any of the other factors described [removed: above] [added: above,] could negatively impact sales at our stores and their level of profitability.

Products that we sell may expose us to potential material liability for property damage, environmental damage, personal [removed: injury] [added: injury,] or death linked to the use of those products by our customers.

While we maintain insurance coverage to mitigate a portion of this risk and may have recourse against our suppliers for losses arising out of defects in products procured from them, we could experience significant losses as a result of claims made against us to the extent adequate insurance is not in place, the products are manufactured by [removed: us] [added: us,] or legal recourse against our suppliers is otherwise not available, or our insurers or suppliers are unwilling or unable to satisfy their obligations to us.

While we have taken and continue to undertake significant steps to protect our customer and confidential information and the functioning of our computer systems [added: and website, a compromise of our data security systems or those of businesses we interact with could result in information related to our customers or business being obtained by unauthorized persons or other operational problems or interruptions.]

[removed: We] develop and update processes and maintain systems in an effort to try to prevent this from occurring, but the development and maintenance of these processes and systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated.

If a compromise of our data security or function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition and, possibly, subject us to additional legal, regulatory and operating [removed: costs] [added: costs,] and damage our reputation in the marketplace.

In addition, a particular local market’s ability to support a store may change because of a change in [added: that market, a change in] our store [removed: format] [added: format,] or the presence of a competitor’s store.

We opened stores at the rate of approximately [removed: 5%] [added: 2%, 3%,] and [removed: 3%] [added: 5%] in [removed: 2011 and] [added: 2013,] 2012, [added: and 2011,] respectively.

We expect to open new stores at the rate of approximately [removed: 2.5%] [added: 2%] to 3% in [removed: 2013;] [added: 2014;] however, [removed: failure to] [added: we cannot assure you that we can] open stores at this [removed: rate] [added: rate, and failure to do so,] could negatively impact our long-term growth.

Our current business [removed: strategy] [added: strategy,] 'pathway-to-profit', which involves reducing our rate of new store openings and using the money saved to add sales personnel at a faster rate, while successful over the last several years, has not yet proven successful on a [removed: long‑term] [added: long-term] basis.

At the time we introduced this strategy, we believed that, over the five year period from 2007 to 2012, we could grow our average store sales to $125 thousand per month and grow our [removed: pre‑tax] [added: pre-tax] earnings as a percent of net sales from 18% to 23%.

The economic weakness that dramatically worsened in the fall of 2008 and continued into 2009 caused us to alter this strategy during 2009 by slowing our annual new store openings to a range of approximately 2% to 5% and temporarily stopping headcount additions except at newly opened stores and stores that [removed: are] [added: were] growing.

A more prolonged downturn in the economy than expected, the prospect of future economic deterioration, changes in the rate of new store openings, difficulty in successfully attracting and retaining qualified sales personnel, an inability to realize anticipated savings from lowering our cost structure, and failure to successfully change our selling process could further adversely impact our ability to grow average store sales, capture earnings leverage, and achieve desired [removed: pre‑tax] [added: pre-tax] earnings results.

Changes in customer or product mix, downward pressure on sales prices, and changes in volume of orders could cause our gross [removed: margin] [added: profit] percentage to fluctuate or decline in the future.

[removed: Changes in our customer or product mix, downward] [added: Downward] pressure on sales [removed: prices,] [added: prices] and changes in the volume of our orders could [added: also] cause our gross [removed: margin] [added: profit] percentage to fluctuate or decline.

From time to [removed: time] [added: time,] we have experienced changes in [added: customer or] product [removed: mix.][added: mix that have caused gross profit to deteriorate.]

[removed: When we change] [added: If] our [added: customer or] product [removed: mix,] [added: mix continues to change,] there can be no assurance that we will be able to maintain our historical gross [removed: margins.][added: profit.]

[removed: In addition, gross margins] [added: Gross profit] can deteriorate if we experience downward pressure on sales prices as a result of deflation, pressures [removed: on] [added: from] customers to reduce [removed: costs] [added: costs,] or increased competition, as was the case in [removed: 2009.][added: 2009 and the latter half of 2013.]

Furthermore, reductions in our volume of purchases, as also happened in [removed: 2009,] [added: 2009 and the latter half of 2013,] can adversely impact gross [removed: margins] [added: profit] by reducing [removed: vendor] [added: supplier] volume allowances.

New stores do not typically achieve operating results comparable to our existing stores until after several years of operation, and stores in new markets face additional challenges to [added: achieving profitability.]

[removed: In] new markets, we have less familiarity with local customer preferences and customers in these markets are less familiar with our name and capabilities.

Inclement weather and other disruptions to the transportation network could impact our distribution [removed: system.][added: system and adversely impact demand for our products.]

Because the functional currency related to most of our foreign operations is the applicable local currency, we are exposed to foreign currency exchange rate risk arising from transactions in the normal course of [removed: business, such as sales to customers and purchases from suppliers denominated in foreign currencies.][added: business.]

[removed: In addition, fluctuations] [added: Fluctuations] in the relative strength of foreign economies [added: and their related currencies] could impact our ability to procure products overseas at competitive prices and our foreign sales.

Our current or future competitors [added: may] include companies with similar or greater market presence, name recognition, and financial, marketing, and other resources, and we believe they will continue to challenge us with their product selection, financial resources, and services.

Our [removed: vendors] [added: suppliers] could discontinue selling products manufactured in foreign countries at any time for reasons that may or may not be in our control or [removed: the vendor’s] [added: our suppliers'] control, including foreign government regulations, domestic government regulations, political unrest, war, disruption or delays in shipments, changes in local economic conditions [removed: and] [added: or] trade issues.

Our operating results and inventory levels could suffer if we are unable to promptly replace a [removed: vendor] [added: supplier] who is unwilling or unable to satisfy our requirements with [removed: a vendor] [added: another supplier] providing equally appealing products.

During the last several years there has been significant fiscal uncertainty in the [removed: country] [added: country,] the resolution of which has been impeded by political gridlock.

Our FAST [removed: SolutionsSM] [added: Solutions®] (industrial vending) business is new, and our competitive advantage could be eliminated.

This consolidation is being driven by customer needs and supplier capabilities, which could cause the industry to become more competitive as greater economies of scale are achieved by [removed: suppliers.][added: suppliers, or as competitors with new business models are willing and able to operate with lower gross profit on select products.]

There can be no assurance [removed: that] we will be able in the future to take advantage effectively of the trend toward consolidation.

The trend in our industry toward consolidation could make it more difficult for us to maintain [added: our current gross and] operating margins.

Furthermore, as our industrial and construction customers face increased foreign competition, and potentially lose business to foreign competitors or shift their operations overseas in an effort to reduce expenses, we may face increased difficulty in growing and maintaining our market [removed: share and growth prospects.][added: share.]

These new [removed: requirements] [added: rules have required and] will [added: continue to] require due diligence [removed: efforts in fiscal year 2013 and thereafter,] [added: efforts,] with initial disclosure requirements [added: becoming] effective in May 2014.

There [added: are and] will [added: continue to] be costs associated with complying with these disclosure requirements, including costs to determine which of our products are subject to the new rules and the source of any 'conflict minerals' used in those products.

We

Changes in our customer or product mix could cause our gross profit percentage to fluctuate or decline.

For example, the growth of our national accounts since the mid-1990’s and of our non-fastener product line since the early 1990’s has adversely affected gross profit, as national accounts have the leverage to negotiate lower prices, and as our non-fastener products generally carry lower gross profit than our fastener products.

In

The products that we sell may expose us to potential claims for property damage, environmental damage, personal injury or death arising out of the use of those products by our customers.

and website, a compromise of our data security systems or those of businesses we interact with could result in information related to our customers or business being obtained by unauthorized persons or other operational problems or interruptions.

In 2007 and 2008, our business strategy focused on opening stores at a rate of approximately 7% to 10% each year, although the economic slowdown in the latter four months of 2008 and all of 2009 caused us to adjust this rate to 2% to 5% for 2009.

We opened stores at an annualized rate of 7% in the second half of 2010.

We believe this will shorten the extended time line for achieving our goal to 2013; however, we cannot assure this will occur.

For example, marketing activities to existing customers and needs communicated to us from existing and prospective customers have caused us to change our product mix in the past.

achieving profitability.

Like most industrial and [removed: construction centric] [added: construction-centric] organizations, we have endured a roller coaster ride over the last several years.

When the swings are dramatic, this can hurt our gross [removed: margins] [added: profit] because we are selling expensive inventory on the shelf at declining prices.

This hurt our gross [removed: margins] [added: profit] in 2009.

The deflation of 2009 ended and these conditions normalized and allowed our gross [removed: margins] [added: profit] to recover in 2010 and 2011.

(See later discussion on gross [removed: margins.)][added: profit.)]

The discussion that follows includes information regarding our sales growth and our sales by product line during [removed: 2012.][added: 2013.]

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 [removed: support,] [added: capabilities,] (5) international operations [removed: (now over] [added: (over] 10% of our sales), (6) FAST [removed: SolutionsSM] [added: Solutions®] (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, [removed: and] (9) additional sales operational support to focus on under performing stores and under performing industrial [removed: vending.][added: vending, and (10) in the case of 2013, additional region and district leadership and additional store personnel.]

As always, we will continue to work to complete this task and maintain our goal of Growth through Customer [removed: Service.][added: Service®.]

| | [removed: 2012] [added: 2013] | | | | [removed: 2011] [added: 2012] | | | [removed: 2010] [added: 2011] | |

| Net sales | $ | [removed: 3,133,577] [added: 3,326,106] | | | [removed: 2,766,859] [added: 3,133,577] | | | [removed: 2,269,471] [added: 2,766,859] | |

| Percentage change | [removed: 13.3] [added: 6.1] | | % | | [removed: 21.9] [added: 13.3] | % | | [removed: 17.6] [added: 21.9] | % |

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 [removed: SolutionsSM] [added: Solutions®] (industrial vending).

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 [removed: SolutionsSM] [added: Solutions®] (industrial vending).

The increase in net sales in [removed: 2010] [added: 2013] came primarily from higher unit sales.

Our growth in net sales was not meaningfully impacted by [removed: deflationary or inflationary price changes in our products or by] the introduction of new products or [removed: services.][added: services, with one exception.]

The growth in net sales at the older store locations was due to the [removed: moderating impacts of the previous recessionary environment.][added: growth drivers]

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: [removed: 2012] [added: 2013] group – opened [removed: 2002] [added: 2003] and earlier, [removed: 2011] [added: 2012] group – opened [removed: 2001] [added: 2002] and earlier, and [removed: 2010] [added: 2011] group – opened [removed: 2000] [added: 2001] and earlier) and opened greater than five years ago (store sites opened as follows: [removed: 2012] [added: 2013] group – opened [removed: 2007] [added: 2008] and earlier, [removed: 2011] [added: 2012] group – opened [removed: 2006] [added: 2007] and earlier, and [removed: 2010] [added: 2011] group – opened [removed: 2005] [added: 2006] and earlier).

The stores opened greater than two years ago represent a consistent ‘same store’ view of our business (store sites opened as follows: [removed: 2012] [added: 2013] group – opened [removed: 2010] [added: 2011] and earlier, [removed: 2011] [added: 2012] group – opened [removed: 2009] [added: 2010] and earlier, and [removed: 2010] [added: 2011] group – opened [removed: 2008] [added: 2009] and earlier).

| Store Age | [removed: 2012] [added: 2013] | | [removed: 2011] [added: 2012] | | [removed: 2010] [added: 2011] |

| Opened greater than 10 years | [removed: 8.1%] [added: 2.1%] | | [removed: 15.2%] [added: 8.1%] | | [removed: 12.5%] [added: 15.2%] |

| Opened greater than 5 years | [removed: 9.8%] [added: 3.6%] | | [removed: 17.1%] [added: 9.8%] | | [removed: 13.0%] [added: 17.1%] |

| Opened greater than 2 years | [removed: 10.8%] [added: 4.4%] | | [removed: 17.9%] [added: 10.8%] | | [removed: 14.6%] [added: 17.9%] |

Stores opened in 2012 contributed approximately [added: $60,626 (or 1.8%) to 2013 net sales and approximately] $24,859 (or 0.8%) to 2012 net sales.

| | [removed: 2012] [added: 2013] | | [removed: 2011] [added: 2012] | | [removed: 2010] [added: 2011] |

| Fastener product line | [removed: 44%] [added: 42%] | | [removed: 47%] [added: 44%] | | [removed: 49%] [added: 47%] |

| Other product lines | [removed: 56%] [added: 58%] | | [removed: 53%] [added: 56%] | | [removed: 51%] [added: 53%] |

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

The second discussion provides a framework for understanding the sequential trends (that is, comparing a [removed: period] [added: month] to the immediately preceding [removed: period)] [added: month)] in our business.

All company sales – During the months in [added: 2013,] 2012, [removed: 2011,] and [removed: 2010,] [added: 2011,] all of our selling locations, when combined, had daily sales growth rates of (compared to the comparable month in the preceding year):

[removed: The] [added: During 2012, the] growth in the first three and a half months [removed: of 2012] generally continued the relative strength we saw in [removed: 2011 and in most of 2010.][added: 2011.]

The first occurred in the late April/May time frame, and then moderated until [removed: September.][added: September 2012.]

This was exaggerated by [added: the impact of Hurricane Sandy and] 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 [removed: patterns,] [added: patterns of our customers,] which are not as business day dependent, this can dilute the daily growth picture given the change in business day [removed: divisor) and the impact of Hurricane Sandy.][added: divisor).]

The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by [removed: 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] [added: 0.2%] in [removed: the fourth quarter by 0.2%).][added: 2013.]

Stores opened greater than two years – Our stores opened greater than two years (store sites opened as follows: [removed: 2012] [added: 2013] group – opened [removed: 2010] [added: 2011] and earlier, [removed: 2011] [added: 2012] group – opened [removed: 2009] [added: 2010] and earlier, and [removed: 2010] [added: 2011] group – opened [removed: 2008] [added: 2009] and earlier) represent a consistent 'same-store' view of our business.

During the months in [added: 2013,] 2012, [removed: 2011,] and [removed: 2010,] [added: 2011,] the stores opened greater than two years had daily sales growth rates of (compared to the comparable month in the preceding year):

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: [removed: 2012] [added: 2013] group – opened [removed: 2007] [added: 2008] and earlier, [removed: 2011] [added: 2012] group – opened [removed: 2006] [added: 2007] and earlier, and [removed: 2010] [added: 2011] group – opened [removed: 2005] [added: 2006] and earlier).

This [removed: group] [added: group, which represented about 88% of our total sales in 2013,] is more cyclical due to the increased market share they enjoy in their local markets.

During the months in [added: 2013,] 2012, [removed: 2011,] and [removed: 2010,] [added: 2011,] the stores opened greater than five years had daily sales growth rates of (compared to the comparable month in the preceding year):

The first landing centers on Easter, which alternates between March and April (Easter occurred in [added: March in 2013, and in] April in [removed: 2012, 2011,] [added: 2012] and [removed: 2010),] [added: 2011),] 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 [removed: Christmas / New] [added: Christmas/New] Year [removed: holidays.][added: holiday.]

The holidays we noted impact the trends because they either move from month-to-month or because they move around during the [removed: week.][added: week (the July 4th and Christmas/New Year holiday impacts noted earlier in this document are examples).]

Our growth in net sales was impacted by slight inflationary price changes in our non-fastener products and some price deflation in our fastener products, with the net impact being a slight drag on growth.

Over the last several years, our FAST Solutions® (industrial vending) initiative has stimulated faster growth with a subset of our customers (discussed later in this document).

of our business (discussed later in this document).

Stores opened in 2013 contributed approximately $18,620 (or 0.6%) to 2013 net sales.

The decrease in our fastener sales as a percentage of total sales has been driven by the continued success of our non-fastener product lines, which we began to add in the 1990s, and by the growth of our FAST Solutions® (industrial vending) program.

This program has lead to greater resilience to weak industrial production of our non-fastener business compared to our fastener business.

| 2013 | 6.7 | % | | 8.2 | % | | 5.1 | % | | 4.8 | % | | 5.3 | % | | 6.0 | % | | 2.9 | % | | 7.2 | % | | 5.7 | % | | 7.7 | % | | 8.2 | % | | 6.7 | % |

| 2013 | 5.0 | % | | 6.5 | % | | 3.4 | % | | 3.1 | % | | 3.5 | % | | 4.3 | % | | 1.4 | % | | 5.5 | % | | 4.2 | % | | 6.1 | % | | 6.2 | % | | 4.9 | % |

| 2013 | 3.2 | % | | 5.6 | % | | 2.3 | % | | 2.0 | % | | 2.7 | % | | 3.4 | % | | 0.6 | % | | 4.7 | % | | 3.2 | % | | 5.3 | % | | 6.1 | % | | 4.8 | % |

Summarizing comments – There are three distinct influences to our growth: (1) execution, (2) currency fluctuations, and (3) economic fluctuations.

This discussion centers on (2) and (3).

The change in currencies in foreign countries (primarily Canada) relative to the United States dollar impacted our growth over the last several years.

During 2011 it lifted our growth by 0.7%, in 2012 it lowered our growth by 0.1%, and in 2013 it lowered our growth by 0.2%.

Regarding economic fluctuations, in 2011 we enjoyed strong growth.

This reflected the strengthening economic environment being experienced by our customers.

While the strength did not apply to all customers and to all geographies we serve, it was strong enough to produce acceptable results.

Then we began to experience several distinct economic slowdowns.

The third occurred in the spring of 2013.

This involved our fastener product line and our construction business (primarily non-residential construction).

This third slowdown, similar to the first two listed, mirrored or slightly led some softening in the PMI index (discussed later in this document).

The fastener piece was heavily impacted by our OEM (original

equipment manufacturing) customers.

These customers utilize our fasteners in the manufacture/assembly of their finished products.

The end markets with the most pronounced weakening included heavy machinery manufacturers with exposure to: mining, military, agriculture, and construction.

The construction piece in 2013 was also hampered by poor weather during the winter and spring time frame throughout many areas in North America.

The fourth and fifth occurred in July 2013 and December 2013.

The daily sales growth in July 2013 and December 2013 were negatively impacted by the timing of the July 4th holiday (Thursday in 2013, Wednesday in 2012, Monday in 2011) and the Christmas/New Year holiday (Wednesday in 2013, Tuesday in 2012, and Sunday in 2011).

This resulted in a 'lone' business day on Friday, July 5, 2013, in which many of our customers were closed, and three distinct one to two day work periods in the last two weeks of December 2013.

The December impact was amplified due to poor weather conditions.

Our daily sales growth trends have improved since September 2013.

This was largely related to changing comparisons to 2012.

Our sales to customers engaged in light and medium duty manufacturing (largely related to consumer products) are improving; this makes sense given the trends in the PMI index.

However, our sales to customers engaged in heavy machinery manufacturing (primarily serving the mining, military, agricultural, and construction end markets), which represents approximately one fifth of our business, continued to experience weak performance in the fourth quarter of 2013.

Beginning in 2014, we intend to utilize a new benchmark.

The new benchmark, labeled 'New Benchmark' in the table below, is a historical average of our sequential daily sales change for the period 1998 to 2013, excluding 2008 and 2009.

Similar to the 'Old Benchmark' we believe this updated benchmark will serve to show the historical pattern.

We excluded the 2008 to 2009 time frame because it contains an extreme economic event and we don't believe it is comparable.

| 2013 | \-0.4 | % | | 2.0 | % | | 3.4 | % | | \-1.1 | % | | 1.0 | % | | 3.2 | % | | \-5.5 | % | | 5.5 | % | | 2.9 | % | | \-2.9 | % | | 8.2 | % |

| 13Delta | \-1.3 | % | | \-1.3 | % | | 0.5 | % | | \-0.8 | % | | \-2.4 | % | | 0.4 | % | | \-3.2 | % | | 2.9 | % | | 0.3 | % | | \-2.2 | % | | \-6.9 | % |

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

| | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | |

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.

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.

| 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 | % |

During 2012 there were two distinct economic slowdowns.

This was a sharp contrast to 2011 and 2010, when changes in foreign currencies increased our growth by 0.7% and 0.6%, respectively.

| 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 | % |

| 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 | % |

| 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 | % |

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.

| 2010 | 15.7 | % | | 29.8 | % | | 30.6 | % | | 17.7 | % | | 22.4 | % |

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.

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.

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.

| 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 | |

| 2010 | \-14.7 | % | | 0.5 | % | | 6.3 | % | | 10.3 | % | | \-0.3 | % |

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.

| | | 2010 | | 257 | | | 420 | | | 440 | | | 792 | | 1,909 |

| | | 2010 | | 892 | | | 1,184 | | | 1,515 | | | 1,925 | | |

| (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 | % | |

| | | 2010 | | 3.4 | % | | 4.6 | % | | 6.1 | % | | 7.5 | % | |

| (2) | Commodity Steel Pricing – We buy and sell various types of steel products; these products consist primarily of different types of threaded fasteners. During the last [removed: decade,] [added: several decades,] there has been nominal movement in overall steel pricing, with some deflation occurring in the wake of the economic crisis of the Far East markets that occurred in the late 1990’s. This trend reversed to inflation in the period from late 2003 to the early part of 2005 and again from mid 2007 to the fall of 2008. In the first half of 2009, we noted meaningful deflation. In 2010, we noted minimal price changes except for stainless steel which did inflate. Stainless steel products represent approximately 5% of our business. In 2011 and [removed: 2012,] [added: 2012] we noted nominal price [removed: increases.] [added: increases while pricing has been flat to nominally down in 2013.] We are exposed to the impacts of commodity steel pricing and our related ability to pass through the impacts to our end customers. |

| (4) | Interest Rates - We have a credit facility totaling $125,000 which expires December 13, 2015. This facility includes a $40,000 letter of credit subfacility. Loans under the facility bear interest at a rate per annum equal to LIBOR plus 0.875%, we pay a commitment fee of 0.10% to 0.125% per annum (depending on usage) on the unused portion of the facility, and we pay a fee of 0.875% per annum on the undrawn amount of outstanding letters of credit and, subject to certain exceptions, an issuance fee of 0.075% of the face amount of the outstanding letters of credit. During the year ended December 31, 2013, we received loan advances under the credit facility and repaid all advances during the year. On December 31, 2013, there were undrawn letters of credit outstanding under the letter of credit subfacility, with a face amount of $34,415. We do not believe our operations are currently subject to significant market risk for interest rates. |

| | |

| --- | --- |

Note – [removed: information] [added: Information] in this section is as of year end [removed: (December 31, 2012 and also sometimes other years when indicated)] unless otherwise noted.

Fastenal Company (together with our [removed: wholly owned] subsidiaries, hereinafter referred to as Fastenal or the Company or by terms such as we, our, or us) began as a partnership in 1967, and was incorporated under the laws of Minnesota in 1968.

The various geographic areas in which we operate these store locations are summarized [removed: later.][added: later in this document.]

| Store and in-plant | [added: 11,550 | |] 10,158 | |

| Non-store selling | [added: 1,242 | |] 1,111 | |

| Distribution | [added: 2,931 | |] 2,451 | |

| Manufacturing | [added: 603 | |] 569 | |

| Administrative | [added: 951 | |] 856 | |

| Non-selling [removed: sub-total] [added: subtotal] | [added: 4,485 | |] 3,876 | |

| Total | [added: 17,277 | |] 15,145 | |

We [removed: operated] [added: operate] 14 distribution centers in North America [removed: as of year end] from which we distribute products to our store and in-plant locations.

[removed: Fastenal] [added: We] began in 1967 with a marketing strategy of supplying threaded fasteners to customers in small, medium-sized, and, in subsequent years, large cities.

We opened our first store in Winona, Minnesota, a city with a population of approximately [removed: 25,000.][added: 27,000.]

| | [added: 2013 | |] 2012 | | 2011 | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | [removed: | 2003 |]

| Net sales (in millions) | [removed: $3,133.6] [added: $3,326.1] | | [removed: $2,766.9] [added: 3,133.6] | | [added: 2,766.9 | |] 2,269.5 | | 1,930.3 | | 2,340.4 | | 2,061.8 | | 1,809.3 | | 1,523.3 | | 1,238.5 | [removed: | 994.9 |]

| Number of stores at year end | [added: 2,687 | |] 2,652 | | 2,585 | | 2,490 | | 2,369 | | 2,311 | | 2,160 | | 2,000 | | 1,755 | | 1,533 | [removed: | 1,314 |]

[removed: At year end, we] [added: We] operated the following number of store locations:

| | | [added: 2013] | [added: | |] 2012 | | | 2011 | | [added: | 2010 | | | 2009 | |]

| North America | United States | | [removed: 2,380] [added: 2,394] | | | [removed: 2,335] [added: 2,380] | |

| | Puerto Rico & Dominican Republic | | [removed: 9] [added: 8] | | | 9 | |

| | Canada | | [removed: 195] [added: 204] | | | [removed: 183] [added: 195] | |

| | Mexico | | [removed: 36] [added: 41] | | | [removed: 34] [added: 36] | |

| Central & South America | Panama, Brazil, [removed: &] Colombia [added: & Chile] | | [removed: 4] [added: 8] | | | [removed: 3] [added: 4] | |

| Southeast Asia | Singapore, Malaysia, & Thailand | | 7 | | | [removed: 4] [added: 7] | |

| Europe | The Netherlands, Hungary, United Kingdom, Germany, Czech Republic, [removed: Italy &] [added: Italy,] Romania [added: & Poland] | | [removed: 13] [added: 17] | | | [removed: 9] [added: 13] | |

| Total | | | [removed: 2,652] [added: 2,687] | | | [removed: 2,585] [added: 2,652] | |

In [added: 2013, 2012, and] 2011, we opened new stores at [removed: the] [added: a] rate of approximately [removed: 5%,] [added: 2%, 3%,] and [removed: opened new stores at the rate of approximately 3% in 2012.][added: 5%, respectively.]

We expect to open [removed: 65] [added: 50] to [removed: 80] [added: 70] stores in [removed: 2013,] [added: 2014,] or a rate of approximately [removed: 2.5%] [added: 2%] to 3%.

The first type of selling location – a Fastenal store location – is either (1) a ‘traditional’ store, which services a wide variety of customers and stocks a wide selection of [removed: all] the products we offer or (2) an ‘overseas’ store which focuses on manufacturing customers and on the fastener product line (this is the type of store format we have outside of North America).

We [added: currently] believe, based on the demographics of the marketplace in North America, that there is sufficient potential in this geographic area to support at least 3,500 total stores.

| North America | United States | [added: 30 | | |] 58 | | | 101 | | | 111 | | | 62 | | [removed: | 138 | |]

| | Puerto Rico & Dominican Republic | — | | | — | | | — | | | [removed: 1] [added: —] | | | [removed: —] [added: 1] | |

| | Canada | [added: 10 | | |] 13 | | | 11 | | | 7 | | | 2 | | [removed: | 21 | |]

| | Mexico | [removed: 2] [added: 5] | | | [removed: 1] [added: 2] | | | 1 | | | 1 | | | [removed: 2] [added: 1] | |

| Central & South America | Panama, Brazil, [removed: &] Colombia [added: & Chile] | [removed: 1] [added: 4] | | | 1 | | | [removed: 2] [added: 1] | | | [removed: —] [added: 2] | | | — | |

| Asia | China | — | | | [removed: 3] [added: —] | | | 3 | | | [removed: 1] [added: 3] | | | [removed: —] [added: 1] | |

| Southeast Asia | Singapore, Malaysia, & Thailand | [added: — | | |] 2 | | | — | | | 2 | | | 1 | | [removed: | — | |]

| Europe | The Netherlands, Hungary, United Kingdom, Germany, Czech Republic, [removed: Italy &] [added: Italy,] Romania [added: & Poland] | 4 | | | [removed: 5] [added: 4] | | | [removed: 1] [added: 5] | | | 1 | | | [removed: —] [added: 1] | |

| Total | | [added: 53 | | |] 80 | | | 122 | | | 127 | | | 69 | | [removed: | 161 | |]

The stores located outside the United States contributed approximately 11% of our consolidated net sales in [removed: 2012,] [added: 2013,] with approximately [removed: 65%] [added: 61%] of this amount attributable to our Canadian operations.

The year end is typically December 31, 2013 unless additional years are included or noted.

We have 2,687 store locations.

We employ 17,277 people.

| | 2013 | | 2012 | |

| Selling subtotal | 12,792 | | 11,269 | |

We sell industrial and construction supplies to end-users (typically business-to-business), and also have some 'walk-in' retail business.

Eleven of these are in the United States, two are in Canada, and one is in Mexico.

| | | | 2013 | | | 2012 | |

| | Subtotal | | 2,647 | | | 2,620 | |

| | Subtotal | 45 | | | 73 | | | 113 | | | 119 | | | 66 | |

Included in the average monthly sales amounts, are sales from our non-store selling locations, such as our Holo-Krome® business (included in the 2009 group, the year it was acquired).

| | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | | | | | | | | | |

| 1-2 years old | 2012 | | 78 | | | 0/0 | | | \-2/0 | | | 65 | | | | | 27 | | 3 | | 140.7 | % |

| 4-5 years old | 2009 | | 66 | | | 1/0 | | | 0/0 | | | 118 | | | | | 106 | | | | 11.3 | % |

| 12-16 years old | 1998-2001 | | 371 | | | 2/0 | | | 0/0 | | | 116 | | | | | 110 | | | | 5.5 | % |

| 16+ years old | 1967-1997 | | 636 | | | 2/0 | | | 0/1 | | | 149 | | | | | 149 | | | | 0.0 | % |

| 1 | We closed 16 stores in both 2013 and 2012. The number of closed stores is noted in the table above as 2013 number/2012 number. |

| 2 | We converted two store locations to non-store selling locations in 2013. We converted three non-store selling locations to store locations in 2012. The number of converted stores is noted in the table above as 2013 number/2012 number, with store locations converted to non-store locations shown as negative numbers. |

The distribution centers in Indiana and California also serve as a 'master' hub to support the needs of the stores in their geographic region as well as provide a broader selection of products for the stores serviced by the other distribution centers.

The Indiana facility also contains our centralized replenishment facility for a portion of our industrial vending business.

This operation is also highly automated.

| | | | | |

| --- | --- | --- | --- | --- |

| | | | | |

Direct marketing continues to be the backbone of our business through our local storefronts and selling personnel.

We support our stores with multi-channel marketing including email marketing, catalogs, promotional flyers, events, online and store signage.

Our national advertising has been focused on NASCAR® sponsorships over the past few years, including sponsoring No. 99 driver, Carl Edwards, in the Sprint Cup Series since 2012.

Along with the NASCAR® sponsorship, we do limited print advertising across a variety of industry publications and Delta Sky magazine.

We, however, believe the convenience provided to customers by operating stores in small,

| | |

| --- | --- |

We had 2,652 store locations at year end.

Globally, we employed 15,145 people as of year end.

| | | |

| --- | --- | --- |

| | | |

| Selling sub-total | 11,269 | |

We sell industrial and construction supplies in a wholesale and retail fashion.

| | Sub-total | | 2,620 | | | 2,561 | |

Beginning in 2007, we disclosed our intention to continue opening new store locations at a rate of approximately 7% to 10% per year (calculated on the ending number of stores in the previous year).

Given the economic slowdown, we decreased this to a range of 2% to 5% in 2009, and this lower rate continued into the first half of 2010.

From July 2010 to December 2010, we opened stores at an annualized rate of approximately 7%.

| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |

| | Sub-total | 73 | | | 113 | | | 119 | | | 66 | | | 161 | |

| | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | |

| 3-4 years old | 2009 | | 67 | | 0/3 | | 104 | | | 90 | | | 15.6% |

| 11-12 years old | 2001 | | 124 | | — | | 110 | | | 104 | | | 5.8% |

| 12-16 years old | 1997-2000 | | 405 | | — | | 113 | | | 105 | | | 7.6% |

| 16+ years old | 1967-1996 | | 482 | | — | | 159 | | | 148 | | | 7.4% |

| 1 | We closed 16 stores and 28 stores in 2012 and 2011, respectively. The respective average sales above were calculated assuming the store closed mid year. The number of closed stores is noted in the table above as 2012 number/2011 number. We converted three non-store selling locations to stores in 2012. We converted one non-store selling location to a store in 2011. |

Store personnel generate a significant portion of our sales through direct calls on customers.

Because of the nature of our business, historically, we have made limited use of the more expensive forms of mass media advertising such as television, radio, and newspapers.

The forms of advertising we typically use include signs, catalogs, and direct mailings.

In recent years, we have expanded our national advertising to include a NASCAR sponsorship utilizing Fastenal Racing® (sponsoring Carl Edwards since 2010), and in 2011 we did some limited national advertising of our FAST SolutionsSM (industrial vending) through publications such as USA Today.

located distribution centers, makes possible the prompt and efficient distribution of products.

| | For the fiscal year ended December 31, [removed: 2012,] [added: 2013,] |

[removed: ][added: ]

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June [removed: 29, 2012,] [added: 28, 2013,] the last business day of the registrant’s most recently completed second fiscal quarter, was [removed: $10,886,627,594,] [added: $12,423,671,823,] based on the closing sale price of the Common Stock on that date.

For purposes of determining this number, all executive officers and directors of the registrant as of June [removed: 29, 2012] [added: 28, 2013] are considered to be affiliates of the registrant.

This number is provided only for the purposes of this report on Form [removed: 10‑K] [added: 10-K] and does not represent an admission by either the registrant or any such person as to the status of such person.

As of [removed: February 1, 2013,] [added: January 24, 2014,] the registrant had [removed: 296,635,127] [added: 296,772,269] shares of Common Stock issued and outstanding.

| Item 1. | | [removed: [Business](#sB064C1FDB3B9008632CB8A560BDD63A5)] [added: [Business](#sE7DFF4CA93DCED84B430CBFCECC82AD3)] | [removed: [4](#sB064C1FDB3B9008632CB8A560BDD63A5)] [added: [3](#sE7DFF4CA93DCED84B430CBFCECC82AD3)] |

| Item 1A. | | [Risk [removed: Factors](#sB2CF37D795E87CE4BF268A5612784838)] [added: Factors](#sA6EDA32A8B05272DA11DCBFCFF371F80)] | [removed: [11](#sB2CF37D795E87CE4BF268A5612784838)] [added: [10](#sA6EDA32A8B05272DA11DCBFCFF371F80)] |

| Item 1B. | | [Unresolved Staff [removed: Comments](#s74426D4DF9B6472CE5B68A56129A6588)] [added: Comments](#s7A5CA3F272C073168362CBFCFF562FFF)] | [removed: [14](#s74426D4DF9B6472CE5B68A56129A6588)] [added: [14](#s7A5CA3F272C073168362CBFCFF562FFF)] |

| Item 2. | | [removed: [Properties](#sB0555FF24FF0FB2E22678A5612CE7F96)] [added: [Properties](#sFFC04C9C738F21212D13CBFCFF85CACB)] | [removed: [15](#sB0555FF24FF0FB2E22678A5612CE7F96)] [added: [14](#sFFC04C9C738F21212D13CBFCFF85CACB)] |

| Item 3. | | [Legal [removed: Proceedings](#s57E03CD9C0C0F1B85C7A8A5612ED69A7)] [added: Proceedings](#sE4356865CD231696B0B0CBFCFFA53F94)] | [removed: [16](#s57E03CD9C0C0F1B85C7A8A5612ED69A7)] [added: [15](#sE4356865CD231696B0B0CBFCFFA53F94)] |

| Item 4. | | [Mine Safety [removed: Disclosures](#sAE1B9E3BF64D4A0BDFC58A561321247E)] [added: Disclosures](#sD4B6DE8B1BF63E023CF1CBFCFFE3A1C5)] | [removed: [16](#sAE1B9E3BF64D4A0BDFC58A561321247E)] [added: [15](#sD4B6DE8B1BF63E023CF1CBFCFFE3A1C5)] |

| Item X. | | [Executive Officers of the [removed: Registrant](#s7C482AAAE54F2CB2CE978A5613464129)] [added: Registrant](#sB15C92DA02B36DC6D747CBFD0002D77F)] | [removed: [17](#s7C482AAAE54F2CB2CE978A5613464129)] [added: [16](#sB15C92DA02B36DC6D747CBFD0002D77F)] |

| Item 5. | | [Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity [removed: Securities](#sA6261E634FC7881C05698A561394C793)] [added: Securities](#s608C8851DC1FE4A284B0CBFD0050317B)] | [removed: [19](#sA6261E634FC7881C05698A561394C793)] [added: [18](#s608C8851DC1FE4A284B0CBFD0050317B)] |

| Item 6. | | [Selected Financial [removed: Data](#s6CA64FD6932136F7146E8A5613C74201)] [added: Data](#s97F30D434C57CD4BDD16CBFD007FA2B6)] | [removed: [20](#s6CA64FD6932136F7146E8A5613C74201)] [added: [19](#s97F30D434C57CD4BDD16CBFD007FA2B6)] |

| Item 7. | | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#sB36D33364DA0FC0CE9CF8A5613E954D3)] [added: Operations](#s2651337EECA7E1F49DB8CBFD009F544A)] | [removed: [20](#sB36D33364DA0FC0CE9CF8A5613E954D3)] [added: [20](#s2651337EECA7E1F49DB8CBFD009F544A)] |

| Item 7A. | | [Quantitative and Qualitative Disclosures About Market [removed: Risks](#s01CC456C05885AB389438A5615BBF9C9)] [added: Risks](#s524AC58B34AEC7A4A0CECBFD02F0D742)] | [removed: [41](#s01CC456C05885AB389438A5615BBF9C9)] [added: [41](#s524AC58B34AEC7A4A0CECBFD02F0D742)] |

| Item 8. | | [Financial Statements and Supplementary [removed: Data](#sA96DB1CF5B4F4197816E8A5615DDC965)] [added: Data](#sAA4DE679D2A93671AB21CBFD031F1E49)] | [removed: [42](#sA96DB1CF5B4F4197816E8A5615DDC965)] [added: [42](#sAA4DE679D2A93671AB21CBFD031F1E49)] |

| Item 9. | | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#sDA42B7F22FCF8908BAFD8A561A48EA9A)] [added: Disclosure](#s0A374978BF49955E9BA0CBFD08205496)] | [removed: [63](#sDA42B7F22FCF8908BAFD8A561A48EA9A)] [added: [61](#s0A374978BF49955E9BA0CBFD08205496)] |

| Item 9A. | | [Controls and [removed: Procedures](#sD14B62BDEE9B47B1A3DD8A561A6B6BA9)] [added: Procedures](#s41E2E55F70BB4A998943CBFD084F2601)] | [removed: [63](#sD14B62BDEE9B47B1A3DD8A561A6B6BA9)] [added: [61](#s41E2E55F70BB4A998943CBFD084F2601)] |

| Item 9B. | | [Other [removed: Information](#sBE272A433BDDC78927168A561A9F5177)] [added: Information](#s5D3143C5DC1754DD8877CBFD086F3CAF)] | [removed: [64](#sBE272A433BDDC78927168A561A9F5177)] [added: [62](#s5D3143C5DC1754DD8877CBFD086F3CAF)] |

| | | [PART [removed: III](#s1B63158B94946132E8F98A561ABFCCCF)] [added: III](#s7A2BBAB4BA8D4602657DCBFD08ADA167)] | |

| Item 10. | | [Directors, Executive Officers, and Corporate [removed: Governance](#sB5D3B6DA339D983D39818A561AF085AF)] [added: Governance](#s3AEF2804E70199073194CBFD08CC7F28)] | [removed: [65](#sB5D3B6DA339D983D39818A561AF085AF)] [added: [63](#s3AEF2804E70199073194CBFD08CC7F28)] |

| Item 11. | | [Executive [removed: Compensation](#sD4A63C91868A3B832D018A561B124AD2)] [added: Compensation](#s8CFF1EB01E0355EE28C5CBFD08FBF1B9)] | [removed: [65](#sD4A63C91868A3B832D018A561B124AD2)] [added: [63](#s8CFF1EB01E0355EE28C5CBFD08FBF1B9)] |

| Item 12. | | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#s0DA246028A48839DDE668A561B4257CE)] [added: Matters](#sF4777AB7459BC75A33CFCBFD091A0ABF)] | [removed: [66](#s0DA246028A48839DDE668A561B4257CE)] [added: [64](#sF4777AB7459BC75A33CFCBFD091A0ABF)] |

| Item 13. | | [Certain Relationships and Related Transactions, and Director [removed: Independence](#sB6E528270535702270C08A561B64C63C)] [added: Independence](#s0E58BB8985605B971218CBFD0949C6B9)] | [removed: [66](#sB6E528270535702270C08A561B64C63C)] [added: [64](#s0E58BB8985605B971218CBFD0949C6B9)] |

| Item 14. | | [Principal Accountant Fees and [removed: Services](#s05272C8F8EC9416EC9718A561B961F28)] [added: Services](#s58AF35330CC15BE079A6CBFD0969725E)] | [removed: [66](#s05272C8F8EC9416EC9718A561B961F28)] [added: [64](#s58AF35330CC15BE079A6CBFD0969725E)] |

| Item 15. | | [Exhibits and Financial Statement [removed: Schedules](#s41810CB433391CA0B8FE8A561BEA77F0)] [added: Schedules](#s52FA0D93180B57FAC573CBFD09C640FE)] | [removed: [67](#s41810CB433391CA0B8FE8A561BEA77F0)] [added: [65](#s52FA0D93180B57FAC573CBFD09C640FE)] |

| | | [Index to [removed: Exhibits](#s4E82C7FD11BE13DCF6868A561C653942)] [added: Exhibits](#sA012F445BF79190CE1D7CBFD0A43511B)] | [removed: [70](#s4E82C7FD11BE13DCF6868A561C653942)] [added: [68](#sA012F445BF79190CE1D7CBFD0A43511B)] |

Portions of our Proxy Statement for the annual meeting of shareholders to be held Tuesday, April [removed: 16, 2013] [added: 22, 2014] (‘Proxy Statement’) are incorporated by reference in Part III.

Portions of our [removed: 2012] [added: 2013] Annual Report to Shareholders are incorporated by reference in Part II.

[removed: FORWARD LOOKING] [added: FORWARD-LOOKING] STATEMENTS

10-K 1 fast1231201310-k.htm 10-K

| | | [PART I](#sDBC10CFD2C570641DE67CBFCFEE990EE) | |

| | | [PART II](#s9047CA945BCC69DF46E3CBFD0031D04D) | |

| | | [PART IV](#sC48868C81FADA0D796F7CBFD09A70496) | |

| | | [Signatures](#sD00140E2AB3EB9FDEFB9CBFD0A146DE5) | [67](#sD00140E2AB3EB9FDEFB9CBFD0A146DE5) |

Certain statements contained in this Form 10-K, or in other reports of the Company and other written and oral statements made from time to time by the Company, do not relate strictly to historical or current facts.

As such, they are considered 'forward-looking statements' that provide current expectations or forecasts of future events.

These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements can be identified by the use of terminology such as anticipate, believe, should, estimate, expect, intend, may, plan, goal, project, will, and similar words or expressions.

Any statement that is not a historical fact, including estimates, projections, future trends, and the outcome of events that have not yet occurred, is a forward-looking statement.

The Company’s forward-looking statements generally relate to our expectations regarding the business environment in which we operate, our projections of future performance, our perceived marketplace opportunities, and our strategies, goals, mission, and vision.

You should understand that forward-looking statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions.

Consequently, no forward-looking statement can be guaranteed and actual results may vary materially.

Factors that could cause our actual results to differ from those discussed in the forward-looking statements include, but are not limited to, economic downturns, weakness in the manufacturing or commercial construction industries, competitive pressure on selling prices, changes in our current mix of products, customers or geographic locations, changes in our purchasing patterns, changes in customer needs, changes in fuel or commodity prices, inclement weather, changes in foreign currency exchange rates, difficulty in adapting our business model to different foreign business environments, weak acceptance or adoption of vending technology or increased competition in vending, difficulty in maintaining installation quality as our vending business expands, difficulty in hiring, relocating, training or retaining qualified personnel, failure to accurately predict the number of North American markets able to support stores or to meet store opening goals, difficulty in controlling operating expenses, difficulty in collecting receivables or accurately predicting future inventory needs, dramatic changes in sales trends, changes in supplier production lead times, changes in our cash position, changes in tax law, changes in the availability or price of commercial real estate, changes in the nature or price of distribution and other technology, cyber-security incidents, potential liability and reputational damage that can arise if our products are defective, and other risks and uncertainties detailed in this Form 10-K under the heading ‘Item 1A.

Each forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any such statement to reflect events or circumstances arising after such date.

10-K 1 fast1231201210-k.htm FORM 10-K

| | | [PART I](#s66C944523AA50A1591E28A561228373E) | |

| | | [PART II](#sA86E65840CC9206DF35C8A561372C301) | |

| | | [PART IV](#s26D6EED7CD5D47A586458A561BB8C54A) | |

| | | [Signatures](#s1AA0BB6BC397E875F38E8A561C3E6D9B) | [69](#s1AA0BB6BC397E875F38E8A561C3E6D9B) |

This Form 10-K and other portions of our 2012 Annual Report to Shareholders of which this Form 10-K forms a part contain statements that are not historical in nature and that are intended or may be interpreted to be, and are hereby identified as, ‘forward-looking statements’ as defined in the Private Securities Litigation Reform Act of 1995 (the ‘Reform Act’), including statements regarding (1) the goals of our long-term growth strategy, ‘pathway to profit’, including the growth in average store sales and profitability expected to result from that strategy and the expected timeline for achieving that growth (including our belief that we can achieve targeted profitability due to a structural lowering of our costs even if our average store sales do not grow as originally expected), (2) our expectations regarding sales growth (including our belief in the ability of our specialists to drive that growth) and our confidence in the sustainability of that growth, (3) our expectations regarding our range of gross margins, (4) our working capital goals and expected returns on total assets when working capital is appropriately managed, (5) our expansion plans, including our estimated 2013 capital expenditures, the expected rate of new store openings, the expected expansion of our foreign operations, the expected opening of new distribution centers as our number of stores increases, and our ability to fund our expansion plans, (6) our plans to increase automation at our distribution centers, (7) markets for North American stores, (8) the future payment of dividends, (9) the expected leasing of new store locations and expansion of owned locations for older stores, (10) the addition of new products, (11) the percentage of net sales expected to be contributed by manufacturing and support services, (12) protection from economic downturns believed to be provided by the number of our customers and varied markets they represent, (13) our ability to mitigate the effects of rising fuel prices by passing freight costs on to our customers, (14) the typical time required before new stores become profitable and achieve operating results comparable to existing stores, (15) the rate of growth and variability of sales at older store locations, (16) our goals for our industrial vending business, including machine signings in 2013, our belief in the transformative nature of industrial vending to leverage our sales growth, and our belief that a local storefront combined with industrial vending provides a business model not easily replicated by our competitors, and (17) our plans to reinvigorate our fastener growth and improve sales growth at our under-performing locations.

In addition, certain statements in our future filings with the Securities and Exchange Commission, in our press releases, and in oral statements made by or with approval of our executive officers, constitute or will constitute ‘forward-looking statements’ under the Reform Act.

Certain risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements are described below.

We assume no obligation to update either such forward-looking statements or the discussion of such risks and uncertainties.

CERTAIN RISK AND UNCERTAINTIES

The following factors are among those that could cause our actual results to differ materially from those predicted in the forward-looking statements described above: (1) a downturn or continued weakness in the economy or in the manufacturing or commercial construction industries, changes in the expected rate of new store openings, difficulties in successfully attracting and retaining additional qualified sales personnel, an inability to realize or sustain improvements in our gross margins and savings from lowering our cost structure, and difficulties in changing our sales process could adversely impact our ability to achieve the goals of our ‘pathway to profit’ initiative and the expected time frame for achieving those goals, (2) a downturn or continued weakness in the economy or in the manufacturing or commercial construction industries could affect our ability to sustain our sales growth, (3) a downturn or continued weakness in the economy or in the manufacturing or commercial construction industries, a change in our current mix of products, customers or geographic locations, a change in our purchasing patterns, a significant change in commodity prices, or increased competitive pressure on our selling prices could impact our ability to achieve gross margins within the range we expect, (4) a downturn or continued weakness in the economy or in the manufacturing or commercial construction industries, a dramatic change in sales trends, a change in accounts receivable collections, a change in raw material costs, a change in buying patterns, or a change in vendor production lead times could cause us to fail to attain our goals regarding working capital and rates of return on assets, (5) a downturn or continued weakness in the economy or in the manufacturing or commercial construction industries, a change from that projected in the number of North American markets able to support stores, or an inability to recruit and retain qualified employees could cause the rate of new store openings to change from that expected, (6) difficulty in adapting our business model to different foreign business environments could alter our plans regarding expansion of foreign operations and negatively impact the growth expected to result from that expansion, (7) changes in the availability or price of commercial real estate, changes in our cash position, a change in distribution technology, or a change in our distribution model could delay the opening of new distribution centers, (8) changes in the rate of new store openings could cause us to modify our planned 2013 capital expenditures, (9) a change in

our ability to generate free cash flow resulting from a slowdown in our sales or our inability to manage expenses could negatively impact the funding of our expansion plans, (10) high expenses involved in procuring necessary technology could impact our ability to increase automation at our distribution centers, (11) a change in our store format or the presence of a competitor’s store could alter our projections regarding the number of markets for North American stores, (12) changes in our financial condition or results of operations or in our tax laws could cause us to modify our expected dividend practices, (13) changes in the availability or price of commercial real estate, a change in our cash position, or a change in our business model could cause us to change our plans regarding the leasing of new stores and the expansion of owned locations for older stores, (14) changes in our cash position, a change in our business model, or a change in the manufacturing or commercial construction industries could cause us to alter the introduction of new products, (15) changes in customer needs or changes in our production capabilities could change the percentage of net sales expected to be contributed by manufacturing and support services, (16) an economic downturn across multiple industries and geographic regions could negate the protections thought to be provided to us by the number of our customers and the varied markets they represent, (17) our ability to pass freight costs on to our customers could be adversely impacted by, in the short term, changes in fuel prices and by competitive selling pressures, (18) an upturn or downturn in the economy could alter, from historic norms, the time it typically takes a new store to achieve profitability or operating results comparable to existing stores and the rate of growth, and variability, of sales at older store locations, (19) a weaker level of industry acceptance or adoption of vending technology from what we are currently experiencing could cause us to fail to meet our goals for our industrial vending business, including machine signings in 2013, or cause industrial vending to be less transformative than expected, (20) our competitors could choose, over time, to open additional locations and to develop their own vending platform which could allow our competitors to replicate our local storefront combined with industrial vending business model mitigating our first mover advantage, (21) difficulties in hiring, relocating, or training qualified sales personnel could adversely impact our ability to reinvigorate our fastener growth and improve sales at our under-performing locations, and (22) unpredictable activity by the national government in the United States could cause unusual economic patterns that could adversely effect our business.

A discussion of other risks and uncertainties which could cause our operating results to vary from anticipated results or which could materially adversely affect our business, financial condition, or operating results is included later in this Form 10-K under the heading entitled ‘Item 1A.

We [removed: also] own the following facilities, excluding store locations, outside of Winona, Minnesota:

| Storage [removed: facility] [added: facilities] | Indianapolis, Indiana | | [removed: 262,000] [added: 389,000] | | [added: 2] |

| Distribution center | Atlanta, Georgia | | 198,000 | | [added: 3] |

| Distribution center | Dallas, Texas | | 176,000 | | [removed: 2] [added: 4] |

| Distribution center | Scranton, Pennsylvania | | [removed: 160,000] [added: 189,000] | | [added: 5] |

| Distribution center | Akron, Ohio | | [removed: 102,000] [added: 152,000] | | [added: 6] |

| Distribution center | [removed: Toronto,] [added: Kitchener,] Ontario, Canada | | 62,000 | | [added: 7] |

| Distribution center | [removed: Greensboro,] [added: High Point,] North Carolina | | [removed: 250,000] [added: 256,000] | | |

| Distribution center and manufacturing facility | Modesto, California | | 328,000 | | [added: 8] |

| [removed: 1] [added: 4] | In addition, this facility [removed: has an auxiliary building which] contains an automated storage and retrieval system with capacity of [removed: 52,000] [added: 14,000] pallet locations and [removed: 250,000] [added: 41,000] tote locations for small parts. |

| [removed: 2] [added: 3] | In addition, this facility contains an automated storage and retrieval system with capacity of [removed: 14,000 pallet locations and 42,000] [added: 56,000] tote locations for small parts. |

In addition, we own [removed: 176] [added: 180] buildings that house our store locations in various cities throughout North America.

[removed: We] [added: In addition to our leased store locations, we] also lease the following:

| Distribution center and manufacturing facility | Edmonton, Alberta, Canada | | [removed: 22,000] [added: 45,000] | | | July 2020 | | One |

| Manufacturing facility | Houston, Texas | | [removed: 20,500] [added: 21,000] | | | June 2014 | | None |

| Supplemental warehouse, office space, and potential store space purchased in 2013, which is subject to a pre-existing retail and warehouse lease | 100,000 | | |

| 1 | In addition, this facility has an auxiliary building which contains an automated storage and retrieval system with capacity of 52,000 pallet locations and 273,000 tote locations for small parts. The FAST Solutions® (industrial vending) automated replenishment facility ('T-Hub') is also located on this property and contains an additional 85,000 tote locations for small parts. |

| 2 | We purchased two additional storage facilities in 2013, one of which is subject to a pre-existing lease. |

| | |

| --- | --- |

| | |

| --- | --- |

| 5 | This facility is currently under construction to add an automated storage and retrieval system with capacity of 117,000 tote locations for small parts. |

| | |

| --- | --- |

| 6 | In addition, this facility contains an automated storage and retrieval system with capacity of 117,000 tote locations for small parts. |

| | |

| --- | --- |

| 7 | A replacement distribution center with approximately 130,000 square feet is currently under construction. |

| | |

| --- | --- |

| 8 | This facility is currently under construction to add an automated storage and retrieval system with capacity of 83,000 tote locations for small parts. |

| Distribution center - additional packaging facility | Salt Lake City, Utah | | 26,000 | | | February 2016 | | One |

| | |

| --- | --- |

| Distribution center (supplemental site) | Edmonton, Alberta, Canada | | 6,400 | | | August 2013 | | None |

| Willard D. Oberton | 1980 | | [removed: 54] [added: 55] | | Chief Executive Officer and Director |

| Leland J. Hein | 1985 | | [removed: 52] [added: 53] | | President |

| Daniel L. Florness | 1996 | | [removed: 49] [added: 50] | | Executive Vice President and Chief Financial Officer |

| Steven A. Rucinski | 1980 | | [removed: 55] [added: 56] | | Executive Vice [removed: President-Sales] [added: President – Sales] |

| Gary A. Polipnick | 1983 | | [removed: 49] [added: 51] | | Executive Vice [removed: President-Sales] [added: President – Sales] |

| Kenneth R. Nance | 1992 | | [removed: 48] [added: 49] | | Executive Vice [removed: President-Sales] [added: President – Sales] |

| Reyne K. Wisecup | 1988 | | [removed: 49] [added: 50] | | Executive Vice [removed: President-Human] [added: President – Human] Resources and Director |

| Nicholas J. Lundquist | 1979 | | [removed: 55] [added: 56] | | Executive Vice [removed: President-Operations] [added: President – Operations] |

| James C. Jansen | 1992 | | [removed: 42] [added: 43] | | Executive Vice [removed: President-Operations] [added: President – Operations] |

| Ashok Singh | 2001 | | [removed: 50] [added: 51] | | Executive Vice [removed: President-Information] [added: President – Information] Technology |

Mr. Rucinski has been [removed: one of our] [added: an] executive vice [removed: presidents] [added: president] – sales since November 2007.

Mr. Polipnick has been [removed: one of our] [added: an] executive vice [removed: presidents] [added: president] – sales since July 2012.

Mr. Polipnick's responsibilities include sales and operational oversight of our [added: business in the] western United [removed: States business.][added: States.]

[removed: Prior] [added: From November 2007] to July 2012, Mr. Polipnick served [removed: in various sales leadership roles, most recently] as [added: the] leader of our Winona based region.

Mr. Nance has been [removed: one of our] [added: an] executive vice [removed: presidents] [added: president] – sales since July 2012.

Mr. Nance's responsibilities include sales and operational oversight of our [added: business in the] eastern United States and [removed: Mexican businesses.][added: Mexico.]

[removed: Prior] [added: From June 2005] to July 2012, Mr. Nance served [removed: in various sales leadership roles, most recently] as [added: the] leader of our Texas based region.

Mr. Lundquist has been [removed: one of our] [added: an] executive vice [removed: presidents] [added: president] – operations since July 2012.

Since July 2012, Mr Jansen's responsibilities include oversight of our [removed: manufacturing and specialty sales areas.][added: manufacturing.]

From May 2005 to November 2007, Mr. Jansen served as leader of systems development (this role encompassed [removed: both information systems and distribution]

| Sheryl A. Lisowski | 1994 | | 46 | | Controller and Chief Accounting Officer |

In addition to his financial role, Mr. Florness' responsibilities also include product development, supplier development, and supply chain.

Prior to November 2007, Mr. Polipnick served in various sales leadership roles.

Prior to June 2005, Mr. Nance served in various sales leadership roles.

both information systems and distribution systems development).

Ms. Lisowski has been our controller and chief accounting officer since October 2013.

From March 2007 to October 2013, Ms. Lisowski served as our controller – accounting operations.

Ms. Lisowski joined Fastenal in 1994 and, prior to March 2007, served in various roles of increasing responsibility within our finance and accounting team.

| Michael S. Camp | 1991 | | 44 | | Executive Vice President-Product and Procurement |

Specialty sales include government sales and industrial vending.

systems development).

Mr. Camp has been our executive vice president – product and procurement since January 2011.

Mr. Camp’s responsibilities include product development, global sourcing, and procurement.

From January 2008 through April 2008, Mr. Camp was our vice president – purchasing and supply chain and from May 2008 to December 2010, Mr. Camp was our vice president – product development and procurement.

From January 2003 through December 2007, Mr. Camp served as the president of our FASTCO subsidiary, was based in Shanghai, China and was responsible for our sourcing, supplier development, and procurement functions within the Asia-Pacific region.

From March 1996 to January 2003, Mr. Camp was the leader of our corporate purchasing departments.

As of [removed: February 1, 2013,] [added: January 24, 2014,] there were approximately 1,300 record holders of our common stock, which includes nominees or broker dealers holding stock on behalf of an estimated [removed: 149,000] [added: 166,000] beneficial owners.

The following table sets forth, by quarter, the high and low closing sale [removed: price] [added: price1] of our shares on The NASDAQ Stock Market for [removed: 2012] [added: 2013] and [removed: 2011.][added: 2012.]

| [removed: 2012:] [added: 2013:] | High | | Low | | [removed: 2011 :] [added: 2012:] | | High | | Low |

| First quarter | [removed: $54.59] [added: $53.18] | | [removed: 43.76] [added: 46.47] | | First quarter | | [removed: $32.42] [added: $54.59] | | [removed: 28.88] [added: 43.76] |

| Second quarter | [removed: $54.65] [added: $52.18] | | [removed: 38.37] [added: 44.95] | | Second quarter | | [removed: $36.01] [added: $54.65] | | [removed: 30.97] [added: 38.37] |

| Third quarter | [removed: $45.30] [added: $50.98] | | [removed: 39.03] [added: 43.99] | | Third quarter | | [removed: $36.65] [added: $45.30] | | [removed: 29.47] [added: 39.03] |

| Fourth quarter | [removed: $46.65] [added: $51.89] | | [removed: 40.20] [added: 45.62] | | Fourth quarter | | [removed: $44.32] [added: $46.65] | | [removed: 32.23] [added: 40.20] |

On January [removed: 16, 2013,] [added: 14, 2014,] we announced a quarterly dividend of [removed: $0.10] [added: $0.25] per share to be paid on [removed: March 1, 2013] [added: February 28, 2014] to shareholders of record at the close of business on [removed: February 1, 2013.][added: January 31, 2014.]

The table below sets forth information regarding purchases [removed: by the Company] of our common stock during each of the last three months of [removed: 2012:][added: 2013:]

| October 1-31, [removed: 2012] [added: 2013] | 0 | | $0.00 | | 0 | | [removed: 1,800,000] [added: 1,600,000] |

| November 1-30, [removed: 2012] [added: 2013] | 0 | | $0.00 | | 0 | | [removed: 1,800,000] [added: 1,600,000] |

| December 1-31, [removed: 2012] [added: 2013] | 0 | | $0.00 | | 0 | | [removed: 1,800,000] [added: 1,600,000] |

| Total | 0 | | $0.00 | | 0 | | [removed: 1,800,000] [added: 1,600,000] |

Set forth below is a graph comparing, for the five years ended December 31, [removed: 2012,] [added: 2013,] the yearly cumulative total shareholder return on our common stock with the yearly cumulative total shareholder return of the S&P [removed: Composite Index] [added: 500 Index, the Dow Jones US Industrial Suppliers Index,] and an index (the 'Peer Group Index') of a group of peer companies selected by us (the 'Peer Group').

The comparison of total shareholder returns in the performance graph assumes that $100 was invested on December 31, [removed: 2007] [added: 2008] in Fastenal Company, the [added: Peer Group Index, the] S&P [removed: Composite Index] [added: 500 Index,] and the [removed: Peer Group] [added: Dow Jones US Industrial Suppliers] Index, and that dividends were reinvested when and as paid.

Comparison of Five Year Cumulative Total Return Among Fastenal Company, [added: the Peer Group Index,]

[removed: ][added: ]

| | [removed: 2007 | |] 2008 | | 2009 | | 2010 | | 2011 | | 2012 | [added: | 2013 |]

1 The closing sale price was obtained from Shareholder.com, a division of Nasdaq OMX.

The following table sets forth our dividend payout (per share basis) in each of the last three years:

| | 2013 | | | | 2012 | | | | 2011 | | |

| First quarter | $ | 0.10 | | | $ | 0.17 | | | $ | 0.25 | |

| Second quarter | 0.20 | | | | 0.17 | | | | 0.13 | | |

| Third quarter | 0.25 | | | | 0.19 | | | | 0.13 | | |

| Fourth quarter | 0.25 | | | | 0.21 | | | | 0.14 | | |

| Total regular dividend | 0.80 | | | | 0.74 | | | | 0.65 | | |

| Supplemental* | — | | | | 0.50 | | | | — | | |

| Total | $ | 0.80 | | | $ | 1.24 | | | $ | 0.65 | |

*Due to income tax rate uncertainties in the United States, we paid a supplemental dividend in December 2012.

Our Board of Directors intends to continue paying quarterly dividends, provided that any future determination as to payment of dividends will depend upon the financial condition and results of operations of the Company and such other factors as are deemed relevant by the Board of Directors.

Purchases of shares of our common stock earlier in 2013 are described later in this Form 10-K under the heading ‘Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations’.

In prior years, we compared our total shareholder return with that of the S&P 500 Index and the Peer Group Index.

However, we have decided to move away from the Peer Group Index because we believe that a broader-based index of public companies within our industry provides a more appropriate basis for comparison.

Therefore, going forward, we will be comparing our total shareholder return with that of the S&P 500 Index and the Dow Jones US Industrial Suppliers Index.

In accordance with SEC rules, we are including the total shareholder return of the Peer Group Index in this Form 10-K for transitional purposes, but will not be including the Peer Group information in future reports.

the S&P 500 Index, and the Dow Jones US Industrial Suppliers Index

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | |

| Fastenal Company | 100.00 | | 121.93 | | 180.07 | | 267.27 | | 294.17 | | 304.64 |

| Peer Group Index | 100.00 | | 125.31 | | 177.17 | | 227.82 | | 253.75 | | 313.59 |

| S&P 500 Index | 100.00 | | 126.46 | | 145.51 | | 148.59 | | 172.37 | | 228.19 |

| Dow Jones US Industrial Suppliers Index | 100.00 | | 127.17 | | 180.70 | | 240.29 | | 262.04 | | 303.35 |

Note - The graph and index table above were obtained from Zachs SEC Compliance Services Group.

In 2012, we paid quarterly dividends of $0.17, $0.17, $0.19, and $0.21 per share and a special supplemental dividend of $0.50 per share in December (total 2012 dividend equaled $1.24 per share).

In 2011, we paid quarterly dividends of $0.25, $0.13, $0.13 and $0.14 per share (total 2011 dividend equaled $0.65 per share).

In 2010, we paid semi-annual dividends of $0.20 and $0.21 per share and a special supplemental dividend of $0.21 per share (total 2010 dividend equaled $0.62 per share).

We expect to pay a smaller quarterly dividend in the initial quarters of 2013 due to the large payout in late 2012.

Our board intends to reassess our dividend payments each quarter as we progress through 2013 with the goal of returning to a dividend pattern more in-line with our quarterly dividends in 2012.

This decision will be influenced by (1) the state of the economy, (2) the strength of our free cash flow (defined as operating cash flow less capital expenditures), (3) changes to the taxation of dividends, and (4) other factors deemed relevant by our board of directors.

Peer Group Index, and S&P Composite Index

| Fastenal Company | 100.00 | | 87.89 | | 107.34 | | 158.53 | | 235.34 | | 258.99 |

| Peer Group Index | 100.00 | | 86.44 | | 108.31 | | 153.14 | | 196.92 | | 219.33 |

| S&P Composite Index | 100.00 | | 63.01 | | 79.69 | | 91.69 | | 93.63 | | 108.62 |

Incorporated herein by reference is Ten-Year Selected Financial Data on [removed: page] [added: pages 4 and] 5 of Fastenal’s [removed: 2012] [added: 2013] Annual Report to Shareholders of which this Form 10-K forms a part, a portion of which is filed as Exhibit 13 to this Form 10-K.

We have audited the accompanying consolidated balance sheets of Fastenal Company and subsidiaries as of December 31, [removed: 2012] [added: 2013] and [removed: 2011,] [added: 2012,] and the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, [removed: 2012.][added: 2013.]

We also have audited the Company’s internal control over financial reporting as of December 31, [removed: 2012,] [added: 2013,] based on criteria established in Internal Control – Integrated Framework [added: (1992)] issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fastenal Company and subsidiaries as of December 31, [removed: 2012] [added: 2013] and [removed: 2011,] [added: 2012,] and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, [removed: 2012,] [added: 2013,] in conformity with U.S. generally accepted accounting principles.

Furthermore, in our opinion, Fastenal Company and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2012,] [added: 2013,] based on criteria established in Internal Control – Integrated Framework [added: (1992)] issued by the Committee of Sponsoring Organizations of the Treadway Commission.

| | [removed: 2012] [added: 2013] | | | | [added: 2012 | | |] 2011 | |

| Cash and cash equivalents [added: at end of year] | $ | [added: 58,506 | | |] 79,611 | | | 117,676 | |

| Marketable securities | [removed: 354] [added: 451] | | | | [removed: 27,165] [added: 354] | |

| Trade accounts receivable, net of allowance for doubtful accounts of [removed: $6,728] [added: $9,248] and [removed: $5,647,] [added: $6,728,] respectively | [removed: 372,159] [added: 414,331] | | | | [removed: 338,594] [added: 372,159] | |

| Inventories | [removed: 715,383] [added: 784,068] | | | | [removed: 646,152] [added: 715,383] | |

| Deferred income tax assets | [removed: 14,420] [added: 18,248] | | | | [removed: 16,718] [added: 14,420] | |

| Other current assets | [removed: 97,361] [added: 107,988] | | | | [removed: 89,833] [added: 97,361] | |

| Prepaid income taxes | [removed: 7,368] [added: 24,869] | | | | [removed: —] [added: 7,368] | |

| Total current assets | [removed: 1,286,656] [added: 1,408,461] | | | | [removed: 1,236,138] [added: 1,286,656] | |

| Property and equipment, less accumulated depreciation | [removed: 516,427] [added: 654,850] | | | | [removed: 435,601] [added: 516,427] | |

| Other assets, net | [removed: 12,749] [added: 12,473] | | | | [removed: 13,209] [added: 12,749] | |

| Total assets | $ | [removed: 1,815,832] [added: 2,075,784] | | | [removed: 1,684,948] [added: 1,815,832] | |

| Accounts payable | $ | [removed: 78,019] [added: 91,253] | | | [removed: 73,779] [added: 78,019] | |

| Accrued expenses | [removed: 126,155] [added: 148,579] | | | | [removed: 111,962] [added: 126,155] | |

| Total current liabilities | [removed: 204,174] [added: 239,832] | | | | [removed: 187,818] [added: 204,174] | |

| Deferred income tax liabilities | [removed: 51,298] [added: 63,255] | | | | [removed: 38,154] [added: 51,298] | |

| Common stock, 400,000,000 shares authorized, [removed: 296,564,382] [added: 296,753,544] and [removed: 295,258,674] [added: 296,564,382] shares issued and outstanding, respectively | [removed: 2,966] [added: 2,968] | | | | [removed: 2,953] [added: 2,966] | |

| Additional paid-in capital | [removed: 61,436] [added: 69,847] | | | | [removed: 16,856] [added: 61,436] | |

| Retained earnings | [removed: 1,477,601] [added: 1,688,781] | | | | [removed: 1,424,371] [added: 1,477,601] | |

| Accumulated other comprehensive income | [removed: 18,357] [added: 11,101] | | | | [removed: 14,796] [added: 18,357] | |

| Total stockholders’ equity | [removed: 1,560,360] [added: 1,772,697] | | | | [removed: 1,458,976] [added: 1,560,360] | |

| Total liabilities and stockholders’ equity | $ | [removed: 1,815,832] [added: 2,075,784] | | | [removed: 1,684,948] [added: 1,815,832] | |

| | [removed: 2012] [added: 2013] | | | | [removed: 2011] [added: 2012] | | | [removed: 2010] [added: 2011] | |

| Net sales | $ | [removed: 3,133,577] [added: 3,326,106] | | | [removed: 2,766,859] [added: 3,133,577] | | | [removed: 2,269,471] [added: 2,766,859] | |

| Cost of sales | [removed: 1,519,053] [added: 1,606,661] | | | | [removed: 1,332,687] [added: 1,519,053] | | | [removed: 1,094,635] [added: 1,332,687] | |

| Gross profit | [removed: 1,614,524] [added: 1,719,445] | | | | [removed: 1,434,172] [added: 1,614,524] | | | [removed: 1,174,836] [added: 1,434,172] | |

| Operating and administrative expenses | [removed: 941,236] [added: 1,007,431] | | | | [removed: 859,369] [added: 941,236] | | | [removed: 745,112] [added: 859,369] | |

| (Gain) [removed: Loss] [added: loss] on sale of property and equipment | [removed: (403] [added: (643] | | ) | | [removed: 194] [added: (403] | [added: )] | | [removed: 35] [added: 194] | |

| Operating income | [removed: 673,691] [added: 712,657] | | | | [removed: 574,609] [added: 673,691] | | | [removed: 429,689] [added: 574,609] | |

| Interest income | [removed: 464] [added: 924] | | | | [removed: 472] [added: 464] | | | [removed: 951] [added: 472] | |

| Earnings before income taxes | [removed: 674,155] [added: 713,468] | | | | [removed: 575,081] [added: 674,155] | | | [removed: 430,640] [added: 575,081] | |

| Income tax expense | [removed: 253,619] [added: 264,832] | | | | [removed: 217,152] [added: 253,619] | | | [removed: 165,284] [added: 217,152] | |

| Net earnings | $ | [removed: 420,536] [added: 448,636] | | | [removed: 357,929] [added: 420,536] | | | [removed: 265,356] [added: 357,929] | |

| Basic net earnings per share | $ | [removed: 1.42] [added: 1.51] | | | [removed: 1.21] [added: 1.42] | | | [removed: 0.90] [added: 1.21] | |

| Diluted net earnings per share | $ | [removed: 1.42] [added: 1.51] | | | [removed: 1.21] [added: 1.42] | | | [removed: 0.90] [added: 1.21] | |

| Basic weighted average shares outstanding | [removed: 296,089] [added: 296,754] | | | | [removed: 295,054] [added: 296,089] | | | [removed: 294,861] [added: 295,054] | |

February 6, 2014

| | 2013 | | | | 2012 | |

| Cash and cash equivalents | $ | 58,506 | | | 79,611 | |

| Interest expense | (113 | | ) | | — | | | — | |

| Purchases of common stock | (200 | ) | | (2 | | ) | | (9,078 | ) | | — | | | — | | | (9,080 | ) |

| Stock options exercised | 389 | | | 4 | | | | 9,302 | | | — | | | — | | | 9,306 | |

| Excess tax benefits from stock-based compensation | — | | | — | | | | 2,787 | | | — | | | — | | | 2,787 | |

| Net earnings | — | | | — | | | | — | | | 448,636 | | | — | | | 448,636 | |

| Balance as of December 31, 2013 | 296,753 | | | $ | 2,968 | | | 69,847 | | | 1,688,781 | | | 11,101 | | | 1,772,697 | |

| Borrowings under line of credit | 260,000 | | | | — | | | — | |

| Payments against line of credit | (260,000 | | ) | | — | | | — | |

| Purchases of common stock | (9,080 | | ) | | — | | | — | |

| Cash paid during each year for interest | $ | 113 | | | — | | | — | |

These locations are primarily in North America.

Leasehold improvements on operating leases are amortized over their estimated service lives on a straight-line basis.

We estimate the value of stock option grants using a Black-Scholes valuation model.

Stock-based compensation expense is recognized on a straight-line basis over the vesting period.

Our stock-based compensation expense is recorded in operating and administrative expenses in the Consolidated Statements of Earnings.

We report the benefits of tax deductions in excess of recognized stock-based compensation as cash flows from financing activities, thereby reducing net operating cash flows and increasing net financing cash flows.

| | | | | 1,019,902 | | | | 840,078 | |

| | 2013 | | | | 2012 | |

| | $ | 148,579 | | | 126,155 | |

| April 16, 2013 | 205,000 | | | $ | 54.00 | | | $ | 49.25 | | | 172,500 | | | — | |

| Total | 8,100,000 | | | | | | | | | | | 4,356,630 | | | 1,442,380 | |

| | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | |

| April 16, 2013 | 0.7 | % | | 5.00 | | 1.6 | % | | 37.42 | % | | $ | 12.66 | |

| Outstanding as of January 1, 2013 | 4,835,792 | | | $ | 32.51 | | | 5.40 |

| Granted | 205,000 | | | $ | 54.00 | | | 8.41 |

| Exercised | (389,162 | ) | | $ | 23.91 | | | |

| Outstanding as of December 31, 2013 | 4,356,630 | | | $ | 34.06 | | | 4.66 |

| Exercisable as of December 31, 2013 | 1,442,380 | | | $ | 23.61 | | | 2.74 |

| | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | |

| | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | |

| Federal | $ | 220,588 | | | 8,547 | | | 229,135 | |

February 7, 2013

FASTENAL COMPANY AND SUBSIDIARIES

| Income taxes payable | — | | | | 2,077 | |

FASTENAL COMPANY AND SUBSIDIARIES

| | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | |

FASTENAL COMPANY AND SUBSIDIARIES

| | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | |

| Balance as of December 31, 2009 | 294,861 | | | $ | 2,948 | | | (1,141 | ) | | 1,175,641 | | | 13,395 | | | 1,190,843 | |

| Net earnings | — | | | — | | | | — | | | 265,356 | | | — | | | 265,356 | |

| Cash and cash equivalents at end of year | $ | 79,611 | | | 117,676 | | | 143,693 | |

On December 31, 2012, we operated approximately 2,700 company-owned or leased store locations.

Cash and cash equivalents are held primarily at two financial institutions.

Notes to Consolidated Financial Statements—Continued

Most store locations have initial lease terms of 36 to 48 months.

The semi-tractor leases typically have a 36\-month term.

Notes to Consolidated Financial Statements—Continued

Goodwill and other identifiable intangible long-lived assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, or on an annual basis if no event or change occurs, to determine that the unamortized balances are recoverable.

Recoverability is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset, and, in the case of goodwill, by also looking at an adverse change in legal factors or the business climate, a transition to a new product or services strategy, a significant change in the customer base, and/or a realization of failed marketing efforts.

If the asset is deemed to be impaired, the amount of impairment is charged to earnings as a part of operating and administrative expenses in the current period.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

We have a stock option employee compensation plan ('stock option plan').

The options granted under our stock option plan vest and become exercisable over a period of up to eight years.

Each option will terminate, to the extent not previously exercised, 13 months after the end of the relevant vesting period.

Compensation expense equal to the grant date fair value is recognized for these awards over the vesting period.

Notes to Consolidated Financial Statements—Continued

| | |

| --- | --- |

| • | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. |

| | |

| --- | --- |

| • | Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, included in Level 1 that are observable either directly or indirectly. |

| | |

| --- | --- |

| • | Level 3 inputs are unobservable for the asset or liability, but are based upon our own assumptions used to measure assets and liabilities at fair value. |

The level in the fair value hierarchy within which a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

| Government and agency securities | 26,845 | | | | 26,845 | | | — | | | — | |

Under the supervision of our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework [added: (1992)] issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, [removed: 2012.][added: 2013.]

| February 6, 2014 | | |

| February 7, 2013 | | |

Those portions of the standards of conduct, as supplemented, that constitute a required element of a Code of Ethics are available without charge by submitting a request to us pursuant to the directions detailed [added: under 'Does Fastenal have a Code of Conduct?'] on [added: the 'Investor FAQs' page of the 'Investors' section of] our website at www.fastenal.com.

There have been no material changes to the procedures by which security holders may recommend nominees to the board of directors since our last report.

There were no material changes to the procedures by which security holders may recommend nominees to the board of directors since our last report, except that those recommendations should now be directed to our nominating committee in lieu of our board of directors in the manner described in the Proxy Statement under the heading 'Corporate Governance and Director Compensation—Nominating Committee'.

| Equity compensation plans approved by security holders | 4,536,630 | | $34.06 | | 7,225,440 |

| Total | 4,536,630 | | | | 7,225,440 |

| Equity Compensation Plans Approved by Security Holders | 4,835,792 | | $32.51 | | 7,323,940 |

| Total | 4,835,792 | | | | 7,323,940 |

Incorporated herein by reference is the information appearing under the headings ‘Corporate Governance and Director Compensation—Director Independence and Other Board Matters’, ‘Corporate Governance and Director Compensation—Related Person Transaction Approval Policy’, [added: and] ‘Corporate Governance and Director Compensation—Transactions with Related [removed: Persons’, and ‘Corporate Governance and Director Compensation—Director Nominations Process’] [added: Persons’] in the Proxy Statement.

Consolidated Balance Sheets as of December 31, [removed: 2012] [added: 2013] and [removed: 2011][added: 2012]

Consolidated Statements of Earnings for the years ended December 31, [added: 2013,] 2012, [removed: 2011,] and [removed: 2010][added: 2011]

Consolidated Statements of Comprehensive Income for the years ended December 31, [added: 2013,] 2012, [removed: 2011,] and [removed: 2010][added: 2011]

Consolidated Statements of Stockholders’ Equity for the years ended December 31, [added: 2013,] 2012, [removed: 2011,] and [removed: 2010][added: 2011]

Consolidated Statements of Cash Flows for the years ended December 31, [added: 2013,] 2012, [removed: 2011,] and [removed: 2010][added: 2011]

| 13 | Portions of [removed: 2012] [added: 2013] Annual Report to Shareholders not included in this Form 10-K (only those sections specifically incorporated by reference in this Form 10-K shall be deemed filed with the SEC) |

Years ended December 31, [added: 2013,] 2012, [removed: 2011,] and [removed: 2010][added: 2011]

| Year ended December 31, [removed: 2010] [added: 2013] | | | | | | | | | | | | | | | |

| Date: [removed: February 7, 2013] | | [added: February 6, 2014] |

[added: |] Date: [added: | |] February [removed: 7, 2013][added: 6, 2014 |]

| [removed: By] | | /s/ Willard D. Oberton | | [removed: By] | | /s/ Daniel L. Florness |

| [removed: By] | | /s/ Robert A. Kierlin | | [removed: By] | | /s/ Stephen M. Slaggie |

| [removed: By] | | /s/ Michael M. Gostomski | | [removed: By] | | /s/ Michael J. Dolan |

| [removed: By] | | /s/ Reyne K. Wisecup | | [removed: By] | | /s/ Hugh L. Miller |

| [removed: By] | | /s/ Michael J. Ancius | | [removed: By] | | /s/ Scott A. Satterlee |

| [removed: By] | | /s/ Rita J. Heise | | [removed: By] | | /s/ Darren R. Jackson |

| 13 | Portions of [removed: 2012] [added: 2013] Annual Report to Shareholders not included in this Form 10-K (only those sections specifically incorporated by reference in this Form 10-K shall be deemed filed with the SEC) | Electronically Filed |

| Allowance for doubtful accounts | $ | 6,728 | | | 9,421 | | | — | | | 6,901 | | | 9,248 | |

| Insurance reserves | $ | 25,188 | | | 52,658 | | 1 | — | | | 46,966 | | 2 | 30,880 | |

| | | |

| --- | --- | --- |

| | | |

| Allowance for doubtful accounts | $ | 4,086 | | | 8,658 | | | — | | | 7,983 | | | 4,761 | |

| Insurance reserves | $ | 23,722 | | | 47,848 | | 1 | — | | | 43,503 | | 2 | 28,067 | |