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

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

BUSINESS AND OPERATIONAL OVERVIEW:

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

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

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

The discussion that follows includes information regarding our sales growth and our sales by product line during 2013. This information provides a summary view to understand the dynamics of the year. However, we feel the real story is told in the monthly sales change, sequential trend, and end market information that follows – that information explains the real impact of the market dynamics affecting us over this period of uncertainty.

Over the last several years, we have continued to make significant investments in (1) store locations, (2) national accounts, (3) government sales, (4) internal manufacturing capabilities, (5) international operations (over 10% of our sales), (6) FAST 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, (9) additional sales operational support to focus on under performing stores and under performing industrial vending, and (10) in the case of 2013, additional region and district leadership and additional store personnel. We are excited about the prospects of each.

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

SALES GROWTH:

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

	2013				2012			2011
Net sales	$	3,326,106			3,133,577			2,766,859
Percentage change	6.1		%		13.3	%		21.9	%

The increase in net sales in 2013 came primarily from higher unit sales. 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. Our growth in net sales was not meaningfully impacted by the introduction of new products or services, with one exception. 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). The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. The growth in net sales at the older store locations was due to the growth drivers

of our business (discussed later in this document). The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.2% in 2013.

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

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

The 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: 2013 group – opened 2003 and earlier, 2012 group – opened 2002 and earlier, and 2011 group – opened 2001 and earlier) and opened greater than five years ago (store sites opened as follows: 2013 group – opened 2008 and earlier, 2012 group – opened 2007 and earlier, and 2011 group – opened 2006 and earlier). These two groups of stores are more cyclical due to the increased market share they enjoy in their local markets. The stores opened greater than two years ago represent a consistent ‘same store’ view of our business (store sites opened as follows: 2013 group – opened 2011 and earlier, 2012 group – opened 2010 and earlier, and 2011 group – opened 2009 and earlier). The daily sales change for each of these groups was as follows:

Store Age	2013		2012		2011
Opened greater than 10 years	2.1%		8.1%		15.2%
Opened greater than 5 years	3.6%		9.8%		17.1%
Opened greater than 2 years	4.4%		10.8%		17.9%

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

Stores opened in 2013 contributed approximately $18,620 (or 0.6%) to 2013 net sales. Stores opened in 2012 contributed approximately $60,626 (or 1.8%) to 2013 net sales and approximately $24,859 (or 0.8%) to 2012 net sales. The rate of growth in sales of store locations generally levels off after they have been open for five years, and, as stated earlier, the sales generated at our older store locations typically vary more with the economy than do the sales of younger stores.

SALES BY PRODUCT LINE:

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

	2013		2012		2011
Fastener product line	42%		44%		47%
Other product lines	58%		56%		53%

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.

MONTHLY SALES CHANGES, SEQUENTIAL TRENDS, AND END MARKET PERFORMANCE

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

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

MONTHLY SALES CHANGES:

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

	Jan.			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Nov.			Dec.
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	%
2012	21.3	%		20.0	%		19.3	%		17.3	%		13.1	%		14.0	%		12.1	%		12.0	%		12.9	%		6.8	%		8.2	%		9.7	%
2011	18.8	%		21.5	%		22.8	%		23.2	%		22.6	%		22.5	%		22.4	%		20.0	%		18.8	%		21.4	%		22.2	%		21.2	%

Stores opened greater than two years – Our stores opened greater than two years (store sites opened as follows: 2013 group – opened 2011 and earlier, 2012 group – opened 2010 and earlier, and 2011 group – opened 2009 and earlier) represent a consistent 'same-store' view of our business. During the months in 2013, 2012, and 2011, the stores opened greater than two years had daily sales growth rates of (compared to the comparable month in the preceding year):

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

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: 2013 group – opened 2008 and earlier, 2012 group – opened 2007 and earlier, and 2011 group – opened 2006 and earlier). This 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 2013, 2012, and 2011, the stores opened greater than five years had daily sales growth rates of (compared to the comparable month in the preceding year):

	Jan.			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Nov.			Dec.
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	%
2012	17.4	%		15.8	%		15.7	%		13.7	%		9.0	%		10.2	%		8.3	%		7.9	%		8.5	%		2.6	%		4.6	%		5.6	%
2011	15.3	%		17.9	%		19.2	%		19.1	%		17.9	%		18.2	%		17.3	%		15.2	%		14.5	%		17.0	%		17.4	%		16.9	%

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. During 2012, the growth in the first three and a half months generally continued the relative strength we saw in 2011. Then we began to experience several distinct economic slowdowns. The first occurred in the late April/May time frame, and then moderated until September 2012. The second occurred in the October/November time frame. This was exaggerated by 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 patterns of our customers, which are not as business day dependent, this can dilute the daily growth picture given the change in business day divisor). 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.

SEQUENTIAL TRENDS:

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

History has identified these landings in our business cycle. They generally relate to months with impaired business days (certain holidays). The first landing centers on Easter, which alternates between March and April (Easter occurred in March in 2013, and in April in 2012 and 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 Christmas/New Year holiday. The holidays we noted impact the trends because they either move from month-to-month or because they move around during the week (the July 4th and Christmas/New Year holiday impacts noted earlier in this document are examples).

The table below shows the pattern to the sequential change in our daily sales. The line labeled 'Old Benchmark' is a historical average of our sequential daily sales change for the period 1998 to 2003. We chose this time frame because it had similar characteristics, a weaker industrial economy in North America, and could serve as a benchmark for current performance. The '2013', '2012', and '2011' lines represent our actual sequential daily sales changes. The '13Delta', '12Delta', and '11Delta' lines indicate the difference between the 'Old Benchmark' and the actual results in the respective year.

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.

	Jan.(1)			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Cumulative Change from Jan. to Oct.
Old Benchmark	0.9	%		3.3	%		2.9	%		-0.3	%		3.4	%		2.8	%		-2.3	%		2.6	%		2.6	%		-0.7	%		15.1	%
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	%
2012	-0.3	%		0.5	%		6.4	%		-0.8	%		0.5	%		2.5	%		-2.7	%		1.3	%		4.3	%		-4.8	%		7.1	%
12Delta	-1.2	%		-2.8	%		3.5	%		-0.5	%		-2.9	%		-0.3	%		-0.4	%		-1.3	%		1.7	%		-4.1	%		-8.0	%
2011	-0.2	%		1.6	%		7.0	%		0.9	%		4.3	%		1.7	%		-1.0	%		1.4	%		3.4	%		0.7	%		21.7	%
11Delta	-1.1	%		-1.7	%		4.1	%		1.2	%		0.9	%		-1.1	%		1.3	%		-1.2	%		0.8	%		1.4	%		6.6	%
New Benchmark	0.8	%		2.2	%		3.8	%		0.4	%		3.1	%		2.7	%		-2.1	%		2.5	%		3.7	%		-1.2	%		15.9	%

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

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

END MARKET PERFORMANCE:

Fluctuations in end market business – The sequential trends noted above were directly linked to fluctuations in our end markets. To place this in perspective – approximately 50% of our business has historically been with customers engaged in some type of manufacturing. The daily sales to these customers grew, when compared to the same period in the prior year, as follows:

	Q1			Q2			Q3			Q4			Annual
2013	7.0	%		5.9	%		4.7	%		7.2	%		6.3	%
2012	20.3	%		15.8	%		14.0	%		9.7	%		14.9	%
2011	15.5	%		18.5	%		18.3	%		21.0	%		20.0	%

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

The best way to understand the change in our industrial production business is to examine the results in our fastener product line. From a company perspective, sales of fasteners grew, when compared to the same period in the prior year, as follows (note: this information includes all end markets):

	Q1			Q2			Q3			Q4			Annual
2013	1.7	%		1.9	%		1.0	%		1.9	%		1.6	%
2012	15.4	%		8.0	%		6.0	%		2.6	%		7.8	%
2011	15.4	%		18.1	%		13.6	%		15.9	%		15.7	%

As was noted earlier in this document, 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, and a larger piece of our fastener business, continued to experience weak performance. This began in 2012 and intensified in 2013.

By contrast, the best way to understand the change in the maintenance portion of the manufacturing business is to examine the results in our non-fastener product lines. From a company perspective, sales of non-fasteners grew, when compared to the same period in the prior year, as follows (note: this information includes all end markets):

	Q1			Q2			Q3			Q4			Annual
2013	10.8	%		8.5	%		8.9	%		12.0	%		10.1	%
2012	25.1	%		21.1	%		18.0	%		13.6	%		19.2	%
2011	26.5	%		27.3	%		26.9	%		27.4	%		27.0	%

The non-fastener business has demonstrated greater relative resilience when compared to our fastener business and to the distribution industry in general, due to our strong FAST Solutions® (industrial vending) program; this is discussed in greater detail later in this document. However, this business has not been immune to the impact of a weak industrial environment.

The patterns related to the industrial production business, as noted above, are influenced by the movements noted in the Purchasing Manufacturers Index ('PMI') published by the Institute for Supply Management (http://www.ism.ws/), which is a composite index of economic activity in the United States manufacturing sector. The PMI in 2013, 2012, and 2011 was as follows:

	Jan.			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Nov.			Dec.
2013	53.1			54.2			51.3			50.7			49.0			50.9			55.4			55.7			56.2			56.4			57.3			57.0
2012	53.7			51.9			53.3			54.1			52.5			50.2			50.5			50.7			51.6			51.7			49.9			50.2
2011	59.2			59.6			59.3			59.4			53.5			55.8			52.3			53.2			53.2			51.5			52.3			52.9

For background to readers not familiar with the PMI index, it is a monthly indicator of the economic health of the manufacturing sector in the United States. Five major indicators that influence the PMI index are new orders, inventory levels, production, supplier deliveries, and the employment environment. When a PMI of 50 or higher is reported, this indicates expansion in the manufacturing industry compared to the previous month. If the PMI is below 50, this represents a contraction in the manufacturing sector. The PMI is not perfectly correlated with our business, as it reflects the activity of certain categories of manufacturers (such as those engaged in light and medium manufacturing) who historically have not accounted for a significant portion of our sales. (Note - the Institute for Supply Management made annual adjustments to reflect seasonal factors to the PMI index effective with the January 2013 report. This table represents the updated PMI index.)

Our non-residential construction customers have historically represented 20% to 25% of our business. The daily sales to these customers grew when compared to the same period in the prior year, as follows:

	Q1			Q2			Q3			Q4			Annual
2013	2.9	%		0.7	%		3.9	%		2.8	%		2.5	%
2012	17.1	%		12.7	%		8.2	%		4.2	%		10.3	%
2011	17.7	%		15.8	%		15.8	%		17.4	%		17.1	%

We believe the weakness in the economy in the fourth quarter of 2012 and throughout 2013, particularly in the non-residential construction market, was amplified by global economic uncertainty combined with economic policy uncertainty in the United States and poor weather conditions.

A graph of the sequential daily sales trends to these two end markets in 2013, 2012, and 2011, starting with a base of '100' in the previous October and ending with the next October, would be as follows:

Manufacturing

Non-Residential Construction

GROWTH DRIVERS OF OUR BUSINESS

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

For a little perspective, we began our business in 1967 with an idea to sell nuts and bolts (fasteners) through vending machines. We soon learned the technology of the 1960's wasn't ready, and also learned a lot of products didn't fit, so we went to 'Plan B'; sell to business users with a direct sales force. It took us a number of years to 'work out the bugs', but ten years later we began to pick up the pace of store openings. After another ten years of expansion we had approximately 50 stores and sales of about $20 million. Our need for cash was growing, as was our desire to allow employee ownership. This led us to a public offering in 1987.

In our first ten years of being public (1987 to 1997), we opened stores at an annual rate approaching 30% per year. In the next ten years (1997 to 2007), we opened stores at an annual rate of approximately 10% to 15% and, since 2007, at an annual rate of approximately 2% to 8% (we opened 53 stores in 2013, or an annual rate of approximately 2.0%, and currently expect to open approximately 50 to 70 stores, or an annual rate of approximately 1.9% to 2.6%, in 2014).

As we gained proximity to more customers, we continued to diversify our growth drivers. This was done to provide existing store personnel with more tools to grow their business organically, and the results of this are reflected in our earlier discussion on sales growth at stores opened greater than five years. In the early 1990's, we began to expand our product lines, and we added new product knowledge to our bench (the non-fastener products now represent over 50% of our sales). This was our first big effort to diversify our growth drivers. The next step began in the mid to late 1990's when we began to add sales personnel with certain specialties or focus. This began with our National Accounts group in 1995, and, over time, has expanded to include individuals dedicated to: (1) sales related to our internal manufacturing division, (2) government sales, (3) internet sales, (4) specific products (most recently metalworking), and (5) FAST Solutions® (industrial vending). Another step occurred at our sales locations (this includes Fastenal stores as well as strategic account stores and in-plant locations) and at our distribution centers, and began with a targeted merchandising and inventory placement strategy that included our 'Customer Service Project' approximately ten years ago and our 'Master Stocking Hub' initiative approximately five years ago. These strategies allowed us to better target where to stock certain products (local store, regional distribution center, master stocking hub, or supplier) and allowed us to improve our fulfillment, lower our freight costs, and improve our ability to serve a broader range of customers. During 2013, we expanded our store based inventory offering around select industries (with an emphasis on fasteners, construction products, and safety products) and in the latter half of 2013 we expanded two key employee groups: (1) the number of employees working in our stores and (2) the number of district and regional leaders supporting our stores. The theme that shines through in all these changes, particularly the last several, is a simple one – invest into and support our sales machine – the local store.

Our FAST Solutions® (industrial vending) operation is a rapidly expanding component of our business. We believe industrial vending will be an important chapter in the Fastenal story; we also believe it has the potential to be transformative to industrial distribution, and that we have a 'first mover' advantage. We are investing aggressively to maximize this advantage. At our investor day in May 2011, we discussed our progress with industrial vending. In addition to our discussion regarding progress, we discussed our goals with the rollout of the industrial vending machines. One of the goals we identified related to our rate of 'machine signings' (the first category below) – our goal was simple, sign 2,500+ machines per quarter (or an annualized run rate of 10,000 machines). In 2012, we crushed this goal, and surpassed the 10,000 signings benchmark in July; our 2012 momentum continued as we finished the year with more than 20,000 machine signings. In 2013, we signed more than 19,000 machines. We consciously slowed the pace in the second quarter of 2013 to promote a 'quality of install' mentality into our rapid approach. We think this was a good decision, and will continue our aggressive push with FAST Solutions® (industrial vending). In July 2013, we began the process of 'optimizing' our installed vending machines. This optimization centered on two aspects: (1) the product mix in each machine to maximize customer savings by promoting frequently consumed items and (2) the brand mix in each machine to streamline replenishment. The latter centers on our vending catalog.

The following table includes some statistics regarding our industrial vending business:

				Q1			Q2			Q3			Q4		Annual
Number of vending machines in		2013		5,728			5,357			4,372			3,848		19,305
contracts signed during the period1		2012		4,568			4,669			5,334			5,591		20,162
		2011		1,405			2,107			2,246			2,084		7,842
Cumulative machines installed2		2013		25,447			29,549			32,248			33,920
		2012		9,798			13,036			17,013			21,095
		2011		2,659			3,867			5,642			7,453
Percent of installed machines that are a FAST 5000		2013		54.3	%		52.2	%		51.1	%		50.4	%
(our most common helix vending machine)3		2012		70.1	%		66.2	%		60.2	%		57.2	%
		2011		78.6	%		76.0	%		74.7	%		72.8	%
Percent of total net sales to		2013		27.5	%		30.0	%		33.3	%		36.6	%
customers with vending machines4		2012		17.8	%		20.8	%		23.2	%		25.8	%
		2011		8.9	%		10.5	%		13.1	%		15.7	%
Daily sales growth to customers		2013		23.9	%		18.9	%		15.2	%		18.7	%
with vending machines5		2012		33.9	%		34.3	%		32.9	%		28.6	%
		2011		50.6	%		43.9	%		42.5	%		40.7	%

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

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

3	This information is intended to highlight the mix change in the machines deployed as our business expands beyond the flagship FAST 5000 machine.

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

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

Note - The 'fleet' of machines we utilize to vend product has expanded over the last several years, and currently includes helix vending machines, lockers, and other formats. The helix machine and lockers (three door, twelve door, and eighteen door) represent the majority of our installed machines. Our total installed machine count was 40,775 at the end of 2013; however, given the lower revenue potential of the three and twelve door locker machines, we report an 'equivalent' machine count where each of these locker machines is counted as a half of a machine (for example, the 33,920 noted in the table above, and the goals indicated earlier in this document). We intend to refine the reporting of all machine equivalencies as we move through 2014 to better reflect the varying revenue potential to our installed vending machines.

PROFIT DRIVERS OF OUR BUSINESS

As we state several times in this document, profit is important to us. For a distribution business it is linked to cash flow, and cash flow funds our growth and creates value for our customers, our employees, our suppliers, and our shareholders. We grow our profits by continuously working to grow sales and to improve our relative profitability. We also grow our profits by allowing our inherent profitability to shine through – we refer to this as the 'pathway to profit'. The distinction is important.

We achieve improvements in our relative profitability by increasing our gross profit, by structurally lowering our operating expenses, or both. We advance on the 'pathway to profit' by increasing the average store size (measured in terms of monthly sales), and by allowing the changing store mix to improve our profits. This is best explained by comparing the varying profitability of our 'traditional' stores in the table below. The average store size for the group, and the average age, number of stores, and pre-tax earnings data by store size for the fourth quarter of 2013, 2012, and 2011, respectively, were as follows:

Sales per Month		Average Age (Years)			Number of Stores			Percentage of Stores			Pre-Tax Earnings Percentage
Three months ended December 31, 2013					Average store sales = $87,798
$0 to $30,000		5.6			258			9.6	%		-14.2	%
$30,001 to $60,000		8.0			776			28.9	%		9.9	%
$60,001 to $100,000		10.9			789			29.4	%		18.8	%
$100,001 to $150,000		12.8			414			15.4	%		23.4	%
Over $150,000		15.6			317			11.8	%		26.1	%
Strategic Account/Overseas Stores					133			4.9	%
Company Total					2,687			100.0	%		19.3	%
Three months ended December 31, 2012					Average store sales = $83,098
$0 to $30,000		4.7			304			11.5	%		-14.4	%
$30,001 to $60,000		7.6			830			31.3	%		12.2	%
$60,001 to $100,000		10.0			759			28.6	%		21.3	%
$100,001 to $150,000		12.9			375			14.1	%		26.0	%
Over $150,000		14.9			272			10.3	%		28.8	%
Strategic Account/Overseas Stores					112			4.2	%
Company Total					2,652			100.0	%		20.9	%
Three months ended December 31, 2011					Average store sales = $78,781
$0 to $30,000		3.8			353			13.7	%		-13.7	%
$30,001 to $60,000		7.2			882			34.1	%		11.7	%
$60,001 to $100,000		9.4			680			26.3	%		21.3	%
$100,001 to $150,000		12.0			352			13.6	%		25.9	%
Over $150,000		15.1			227			8.8	%		27.4	%
Strategic Account/Overseas Stores					91			3.5	%
Company Total					2,585			100.0	%		20.2	%

Note – Amounts may not foot due to rounding difference.

When we originally announced the 'pathway to profit' strategy in 2007, our goal was to increase our pre-tax earnings, as a percentage of sales, from 18% to 23%. This goal was to be accomplished by slowly moving the mix from the first three categories ($0 to $30,000, $30,001 to $60,000, and $60,001 to $100,000, these groups represented 76.5% of our store base in the first three months of 2007, the last quarter before we announced the 'pathway to profit') to the last three categories ($60,001 to $100,000, $100,001 to $150,000, and over $150,000, these groups represented 56.6% of our store base in the fourth quarter of 2013) and by increasing the average store sales from $71,600 (in the first three months of 2007) to approximately $125,000 per month. The weak economic environment in 2009 caused our average store size to decrease, and consequently lowered our level of profitability; however, we never lost sight of the simple 'economic math' of our business, and our ability to grow the level of profitability long-term. In the aftermath of 2009, we grew the average store size, we improved our gross profit, and we structurally lowered our operating expenses. The improvement in the latter two allowed us to amplify the 'pathway to profit' and effectively lowered the average store size required to hit our 23% goal. Today we believe we can accomplish our 'pathway to profit' goal with average store sales of approximately $100,000 to $110,000 per month.

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

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

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

	Q1 2007			Q3 2008			Q4 2012			Q1 2013			Q2 2013			Q3 2013			Q4 2013
Total net sales reported	$489,157			$625,037			$757,235			$806,326			$847,596			$858,424			$813,760
Less: non-store sales (approximate)	40,891			57,267			95,951			101,624			109,300			108,427			105,499
Store net sales (approximate)	$448,266			$567,770			$661,284			$704,702			$738,296			$749,997			$708,261
% change since Q1 2007				26.7	%		47.5	%		57.2	%		64.7	%		67.3	%		58.0	%
% change (twelve months)				17.5	%		8.2	%		4.2	%		4.6	%		6.8	%		7.1	%
Percentage of sales through a store	92	%		91	%		87	%		87	%		87	%		87	%		87	%
Average monthly sales per store	$72			$82			$83			$88			$92			$93			$88
(using ending store count)
% change since Q1 2007				13.9	%		15.3	%		22.2	%		27.8	%		29.2	%		22.2	%
% change (twelve months)				9.3	%		5.1	%		2.3	%		3.4	%		5.7	%		6.0	%
Company pre-tax earnings	18.1%			18.8%			20.9%			21.7%			22.7%			22.0%			19.3%

	Q1 2007			Q3 2008			Q4 2012			Q1 2013			Q2 2013			Q3 2013			Q4 2013
Store locations - quarter end count	2,073			2,300			2,652			2,660			2,677			2,686			2,687
% change since Q1 2007				11.0	%		27.9	%		28.3	%		29.1	%		29.6	%		29.6	%
% change (twelve months)				7.2	%		2.6	%		1.9	%		1.6	%		1.4	%		1.3	%
Store personnel - absolute headcount	6,849			9,123			10,347			10,108			10,160			10,607			11,261
% change since Q1 2007				33.2	%		51.1	%		47.6	%		48.3	%		54.9	%		64.4	%
% change (twelve months)				17.9	%		0.2	%		-3.6	%		-4.5	%		0.0	%		8.8	%
Store personnel - FTE	6,383			8,280			9,035			8,875			8,943			9,350			9,771
Non-store selling personnel - FTE	616			599			1,070			1,121			1,174			1,190			1,214
Subtotal of all sales personnel - FTE	6,999			8,879			10,105			9,996			10,117			10,540			10,985
Distribution personnel-FTE	1,646			1,904			1,872			1,819			1,867			1,986			2,040
Manufacturing personnel - FTE 1	316			340			544			565			572			570			581
Administrative personnel-FTE	767			805			811			832			857			867			876
Subtotal of non-sales personnel - FTE	2,729			3,049			3,227			3,216			3,296			3,423			3,497
Total - average FTE headcount	9,728			11,928			13,332			13,212			13,413			13,963			14,482
% change since Q1 2007
Store personnel - FTE				29.7	%		41.5	%		39.0	%		40.1	%		46.5	%		53.1	%
Non-store selling personnel - FTE				-2.8	%		73.7	%		82.0	%		90.6	%		93.2	%		97.1	%
Subtotal of all sales personnel - FTE				26.9	%		44.4	%		42.8	%		44.5	%		50.6	%		57.0	%
Distribution personnel-FTE				15.7	%		13.7	%		10.5	%		13.4	%		20.7	%		23.9	%
Manufacturing personnel-FTE 1				7.6	%		72.2	%		78.8	%		81.0	%		80.4	%		83.9	%
Administrative personnel-FTE				5.0	%		5.7	%		8.5	%		11.7	%		13.0	%		14.2	%
Subtotal of non-sales personnel - FTE				11.7	%		18.2	%		17.8	%		20.8	%		25.4	%		28.1	%
Total - average FTE headcount				22.6	%		37.0	%		35.8	%		37.9	%		43.5	%		48.9	%
% change (twelve months)
Store personnel - FTE				15.2	%		4.0	%		-0.3	%		-0.2	%		1.1	%		8.1	%
Non-store selling personnel - FTE				-2.4	%		12.3	%		12.3	%		11.4	%		11.6	%		13.5	%
Subtotal of all sales personnel - FTE				13.8	%		4.9	%		1.0	%		-0.6	%		2.2	%		8.7	%
Distribution personnel-FTE				6.0	%		2.9	%		0.2	%		-0.7	%		5.2	%		9.0	%
Manufacturing personnel - FTE 1				1.8	%		5.4	%		7.2	%		5.0	%		4.8	%		6.8	%
Administrative personnel - FTE				7.9	%		1.9	%		4.5	%		7.9	%		7.3	%		8.0	%
Subtotal of non-sales personnel - FTE				6.0	%		3.0	%		2.5	%		2.4	%		5.7	%		8.4	%
Total - average FTE headcount				11.7	%		4.4	%		1.4	%		0.1	%		3.1	%		8.6	%

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

STATEMENT OF EARNINGS INFORMATION (percentage of net sales) for the periods ended December 31:
		Twelve-month Period
		2013			2012			2011
Net sales		100.0	%		100.0	%		100.0	%
Gross profit		51.7	%		51.5	%		51.8	%
Operating and administrative expenses		30.3	%		30.0	%		31.1	%
(Gain) loss on sale of property and equipment		0.0	%		0.0	%		0.0	%
Operating income		21.4	%		21.5	%		20.8	%
Net interest income		0.0	%		0.0	%		0.0	%
Earnings before income taxes		21.5	%		21.5	%		20.8	%
Note – Amounts may not foot due to rounding difference.

Gross profit – percentage for 2013 increased from 2012.

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

		Q1			Q2			Q3			Q4
2013		52.3	%		52.2	%		51.7	%		50.6	%
2012		51.3	%		51.6	%		51.6	%		51.6	%
2011		52.0	%		52.2	%		51.9	%		51.2	%

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

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

The first two quarters of 2013 experienced a strong improvement in gross profit. A piece of this related to the seasonal impact of improving freight utilization, but this improvement was constrained due to the weak sales growth. The real driver of improvement related to our store personnel, armed with our newly implemented price guidance system, exercising great judgment about pricing their product. During the third quarter of 2013, we experienced a sequential (second to third quarter) decline in our gross profit. Most of this decline was in the transactional profit (about 85% of the change); with the balance in the supplier incentive gross profit. The decline in our supplier incentive gross profit was due to our continued pattern of weak sales growth. Within the transaction component, product mix stood out as the most identifiable portion (this was about 40% of the total drop, and reflects the continued weakness in our fastener growth and the strength in the growth in safety products - fasteners carry a higher gross profit, safety products don't). The remaining portion of the transactional decline was split across a number of causes, the result of a very competitive landscape and our competitive nature. Beginning in the third quarter, we had

placed a greater emphasis on expanding the headcount at our store locations, putting more emphasis on shorter cycle sales efforts, and moving the needle on top line growth. This impacted our gross profit in the short term; however, we think this approach is the correct long-term move as it reinforces our trust in our store personnel and our desire to grow our business long-term, but it does make for a bumpier ride. In the fourth quarter of 2013, we experienced another sequential (third to fourth quarter) decline in gross profit. Similar to prior years, we lost some gross profit due to a seasonal drop in freight utilization and in supplier incentive gross profit. This represented about 30% of the drop and is expected to recover in the new year as volume increases (seasonality) and incentive programs reset (typically calendar based). The remaining drop relates to factors noted in the third quarter. We believe our expected gross profit range (51% to 53%) is still reasonable for 2014.

Operating and administrative expenses - as a percentage of sales were essentially unchanged from 2012 to 2013.

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

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

		Twelve-month Period
		2013			2012			2011
Employee related expenses		4.6	%		10.1	%		19.7	%
Occupancy related expenses		11.2	%		4.8	%		7.4	%
Selling transportation costs		0.8	%		10.1	%		26.5	%

Employee related expenses include: (1) payroll (which includes cash compensation, stock option expense, and profit sharing), (2) health care, (3) personnel development, and (4) social taxes. Performance bonuses (other than those related to our vending business) were down in 2013; however, this decrease was offset by increases related to the following factors: (1) average employee headcount, measured on a full-time equivalent basis grew 8.6% from the fourth quarter of 2012 to the fourth quarter of 2013, (2) sales commissions grew in 2013 due to the static gross profit combined with sales growth, (3) our industrial vending bonuses grew in the first quarter and the twelve month period, although they contracted in the second, third and fourth quarters due to changes in the pace of the vending rollout, (4) our profit sharing contribution grew, and (5) our health care costs grew. The increase in 2012 was driven by the following factors: (1) average employee headcount, measured on a full-time equivalent basis grew 4.4% from the fourth quarter of 2011 to the fourth quarter of 2012, (2) sales commissions grew, (3) bonus amounts related to our growth drivers grew (this includes items such as industrial vending bonuses and manager minimum pay adjustments), and (4) our profit sharing contribution grew.

Occupancy related expenses include: (1) building rent and depreciation, (2) building utility costs, (3) equipment related to our stores and distribution locations, and (4) FAST Solutions® (industrial vending) equipment (we consider the vending equipment to be a logical extension of our store operation and classify the expense as occupancy). The increase in 2013 was driven by (1) a dramatic increase in the amount of FAST Solutions® (industrial vending) equipment as discussed earlier in this document, (2) an increase in building utility cost, (3) a nominal increase in the number of store locations, and (4) an increased investment in our distribution infrastructure over the last several years. In 2013, the industrial vending component represented approximately 60% of the increase, with the balance related to our distribution automation/expansion and changes to utilities and external rent. Almost all of our occupancy increase in 2012 related to the increase in the amount of FAST Solutions® (industrial vending) equipment, as our energy savings offset most of the increase relating to items (3) and (4). The energy savings were driven by our efforts to lower energy consumption, a mild winter, and a drop in natural gas prices during the heating season.

Our selling transportation costs consist primarily of our store fleet as most of the distribution fleet costs are included in the cost of sales. Selling transportation costs included in operating and administrative expenses were essentially flat in 2013, when compared to 2012. This was helped by stronger sales patterns related to our used store truck fleet, which lowered our vehicle ownership costs. The increase in 2012 was primarily related to the increase in per gallon fuel costs discussed below and the expansion of our fleet related to additions to our non-store sales personnel, particularly FAST Solutions® (industrial vending) vehicles.

The last several years have seen meaningful swings in the cost of diesel fuel and gasoline – During the first, second, third, and fourth quarters of 2013, our total vehicle fuel costs were approximately $10.6, $10.6, $11.2, and $9.6 million, respectively. During the first, second, third, and fourth quarters of 2012, our total vehicle fuel costs were approximately $10.6, $10.8, $10.8, and $10.3 million, respectively. The changes resulted from variations in fuel costs, variations in the service levels provided to our stores from our distribution centers, changes in the number of vehicles at our store locations, and changes in the number of other sales centered vehicles as a result of store openings and the expansion of our non-store sales force. These fuel costs include the fuel utilized in our distribution vehicles (semi-tractors, straight trucks, and sprinter trucks) which is recorded in cost of sales and the fuel utilized in our store delivery and other sales centered vehicles which is included in operating and administrative expenses (the split in the last several years has been approximately 50:50 between distribution and store and other sales centered use).

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

Per Gallon Average Price		Q1				Q2			Q3			Q4			Annual Average1
2013 price
Diesel fuel		$	4.02			3.90			3.90			3.88			3.93
Gasoline		$	3.51			3.60			3.56			3.30			3.49
2012 price
Diesel fuel		$	3.92			3.98			3.88			4.05			3.96
Gasoline		$	3.53			3.73			3.61			3.53			3.60
2011 price
Diesel fuel		$	3.60			4.04			3.90			3.87			3.85
Gasoline		$	3.22			3.78			3.62			3.37			3.50
Per Gallon Price Change		Q1				Q2			Q3			Q4			Annual1
2013 change
Diesel fuel		2.6		%		-2.0	%		0.5	%		-4.2	%		-0.8	%
Gasoline		-0.6		%		-3.5	%		-1.4	%		-6.5	%		-3.1	%
2012 change
Diesel fuel		8.9		%		-1.5	%		-0.5	%		4.7	%		2.9	%
Gasoline		9.6		%		-1.3	%		-0.3	%		4.7	%		2.9	%

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

Income taxes – Income taxes, as a percentage of earnings before income taxes, were approximately 37.1% and 37.6% for 2013 and 2012, respectively. As our international business and profits grow over time, the lower income tax rates in those jurisdictions, relative to the United States, have begun to lower our effective tax rate.

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

Dollar Amounts	2013				2012			2011
Net earnings	$	448,636			420,536			357,929
Basic EPS	1.51				1.42			1.21
Diluted EPS	1.51				1.42			1.21
Percentage Change	2013				2012			2011
Net earnings	6.7		%		17.5	%		34.9	%
Basic EPS	6.3		%		17.4	%		34.4	%
Diluted EPS	6.3		%		17.4	%		34.4	%

During 2013, the net earnings increase was greater than that of sales primarily due to the expansion of gross profit realized and a slightly lower income tax rate. During 2012, the net earnings increase was greater than that of sales primarily due to the effective management of operating expenses and a slightly lower income tax rate. During 2011, the net earnings increase was greater than that of sales primarily due to the effective management of operating expenses and a slightly lower income tax rate.

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

Dollar change	2013				2012
Accounts receivable, net	$	42,172			33,565
Inventories	68,685				69,231
Operational working capital	$	110,857			102,796
Annual percentage change	2013				2012
Accounts receivable, net	11.3		%		9.9	%
Inventories	9.6		%		10.7	%
Operational working capital	10.2		%		10.4	%

The growth in accounts receivable noted above was driven by our sales growth in the final two months of the period. The strong growth in recent years with our international business and of our large customer accounts has created some difficulty with managing the growth of accounts receivable relative to the growth in sales.

Our growth in inventory balances over time does not have as direct a relationship to our monthly sales patterns as does our growth in accounts receivable. This is impacted by other aspects of our business. For example, the dramatic economic slowdown in late 2008 and early 2009 caused our inventory to spike. This occurred because the lead time for inventory procurement is typically longer than the visibility we have into future monthly sales patterns. Over the last decade, we increased our relative inventory levels due to the following: (1) new store openings, (2) expanded stocking breadth at our distributions centers (for example, our master stocking hub in Indianapolis expanded its product breadth over six fold from 2005 to 2011), (3) expanded direct sourcing, (4) expanded exclusive brands (private label), (5) expanded industrial vending solutions, (6) national accounts growth, (7) international growth, and (8) expanded stocking breadth at individual stores. Items (1) through (7) created most of our inventory growth in both 2013 and 2012, while item (8) contributed to our inventory growth in 2012.

As we indicated in earlier communications, our goal is to target a ratio of annual sales to accounts receivable and inventory (Annual Sales: AR&I) of approximately a 3.0:1 ratio. On December 31, 2013 and 2012, we had a ratio of 2.8:1 and 2.9:1, respectively.

Liquidity and Capital Resources

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

	2013				2012			2011
Net cash provided	$	416,120			396,292			268,489
% of net earnings	92.8		%		94.2	%		75.0	%

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

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

	2013			2012			2011
Store	58	%		56	%		56	%
Distribution center	42	%		44	%		44	%
Total	100	%		100	%		100	%

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

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

	2013				2012			2011
Net cash used	$	201,792			107,204			112,223
% of net earnings	45.0		%		25.5	%		31.4	%

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

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

	2013				2012			2011
Net capital expenditures	$	201,550			133,882			116,489
% of net earnings	44.9		%		31.8	%		32.5	%

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

Property and equipment expenditures in 2013, 2012, and 2011 consist of: (1) purchase of software and hardware for Fastenal’s information processing systems, (2) addition of certain pickup trucks, (3) purchase of signage, shelving, and other fixed assets related to store openings, (4) addition of manufacturing and warehouse equipment, (5) expansion or improvement of certain owned or leased store properties, (6) expansion of Fastenal’s distribution/trucking fleet, (7) purchases related to FAST Solutions® (industrial vending), which primarily consists of automated vending equipment (2013, 2012, and 2011), and the construction of a new centralized distribution facility (2013), and (8) cost related to the expansion of our distribution centers in Winona, Minnesota (2012 and 2011), Akron, Ohio (2013), Atlanta, Georgia (2013), Scranton, Pennsylvania (2013), Kitchener, Ontario, Canada (2013), and Indianapolis, Indiana (2013). Disposals of property and equipment consist of the planned disposition of certain pick-up trucks, semi-tractors, and trailers in the normal course of business, and the disposition of real estate relating to several store locations.

Set forth below is an estimate of our 2014 net capital expenditures and a recap of our 2013, 2012, and 2011 net capital expenditures.

	2014				2013			2012			2011
Net Capital Expenditures	(Estimate)				(Actual)			(Actual)			(Actual)
Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities	$	147,000			164,940			105,278			83,607
Shelving and related supplies for store openings and for product expansion at existing stores	3,400				6,354			5,240			5,259
Data processing software and equipment	16,500				12,652			11,102			12,036
Real estate and improvements to store locations	4,500				9,603			6,014			5,157
Vehicles	13,900				12,991			10,772			13,984
Proceeds from sale of property and equipment	(4,600		)		(4,990	)		(4,524	)		(3,554	)
	$	180,700			201,550			133,882			116,489

We anticipate funding our current expansion plans with cash generated from operations, from available cash and cash equivalents, and from our borrowing capacity. Because of the considerable cash requirements expected in 2013, 2014, and 2015 for expanding our FAST Solutions® (industrial vending) and increasing the use of automation in our distribution centers, together with the large dividend payout late in 2012, we established a $125,000 unsecured credit facility in December 2012. During the first, second, third, and fourth quarters of 2013 we borrowed up to $20,000, $10,000, $70,000, and $75,000, respectively, under this facility. All amounts were repaid at the end of each quarter. As of year end, we had no material outstanding commitments for capital expenditures. In addition, as we enter 2014, we also expect to open new stores in the United States, and continue opening additional stores in our foreign markets.

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

	Total				2014			2015 & 2016			2017 & 2018			After 2018
Facilities and equipment	$	225,115			89,289			106,357			29,469			—
Vehicles	35,792				20,263			15,529			—			—
Total	$	260,907			109,552			121,886			29,469			—

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

	2013				2012			2011
Net cash used	$	234,443			327,513			181,819
% of net earnings	52.3		%		77.9	%		50.8	%

The fluctuations are due to changes in the level of our dividend payments and in the level of stock purchases. These amounts were partially offset by the exercise of stock options by our employees and the related tax impact. These items in dollars and as a percentage of earnings were as follows:

	2013				2012				2011
Dividends	$	237,456			367,306				191,741
% of net earnings	52.9		%		87.3		%		53.6	%
Stock purchases	9,080				—				—
% of net earnings	2.0		%		—		%		—	%
Total returned to shareholders	$	246,536			367,306				191,741
% of net earnings	54.9		%		87.3		%		53.6	%
Proceeds from the exercise of stock options, plus the excess tax benefits of stock options	$	(12,093	)		$	(39,793	)		(9,922	)
% of net earnings	(2.6		)%		(9.4		)%		(2.8	)%
Net impact to cash used	$	234,443			327,513				181,819
% of net earnings	52.3		%		77.9		%		50.8	%

Stock Purchases— During 2013, we purchased 200,000 shares of our common stock at an average price of approximately $45.40 per share. We did not purchase any stock in 2012 or 2011. As of February 6, 2014, we have authority from our board of directors to purchase up to 1,600,000 shares of our common stock.

Dividends — We declared a dividend of $0.25 per share on January 14, 2014. We paid aggregate annual dividends per share of $0.80, $1.24, and $0.65 in 2013, 2012, and 2011, respectively.

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

Effects of Inflation— In total, we experienced minimal price changes in 2013 and 2012. At the product level, we experienced some deflation in our fastener products and limited to slight inflation in our non-fastener products in 2013.

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

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

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

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

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

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

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

New Accounting Pronouncements

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

Proposed Accounting Pronouncements

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

Geographic Information

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