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, oil exploration, production, and refinement companies, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our stores and customers are primarily located in North America.

BUSINESS DISCUSSION

The following pages contain a marketplace overview, and a general sales growth and product line mix discussion, for each of the last three years. This is followed by a more in depth discussion of the following:

1.	Monthly sales changes, sequential trends, and end market performance – a recap of our recent sales trends and some insight into the activities with different end markets.

2.	Growth drivers of our business – a recap of how we grow our business.

3.	Profit drivers of our business – a recap of how we increase our profits.

4.	Statement of earnings information – a recap of the components of our income statement.

5.	Operational working capital, balance sheet, and cash flow – a recap of the operational working capital utilized in our business, and the related cash flow.

While reading these items, it is helpful to appreciate several aspects of our marketplace: (1) it's big, the North American marketplace for industrial supplies is estimated to be in excess of $160 billion per year (and we have expanded beyond North America), (2) no company has a significant portion of this market, (3) many of the products we sell are individually inexpensive, (4) when our customer needs something quickly or unexpectedly our local store is a quick source, (5) the cost and time to manage and procure the products we sell is meaningful, (6) the cost to move these products, many of which are bulky, can be significant, (7) many customers would prefer to reduce their number of suppliers to simplify their business, and (8) many customers would prefer to utilize various technologies to improve availability and reduce waste.

Our motto is Growth through Customer Service®. This is important given the points noted above. We believe in efficient markets – to us, this means we can grow our market share if we provide the greatest value to our customers. We believe our ability to grow is amplified if we can service our customers at the closest economic point of contact. For us, this 'closest economic point of contact' is the local store; therefore, our focus centers on understanding our customers' day, their opportunities, and their obstacles.

The concept of growth is simple, find more customers every day and increase your activity with them. However, execution is hard work. First, we recruit service minded individuals to support our customers and their business. Second, we operate in a decentralized fashion to help identify the greatest value for our customers. Third, we build a great machine behind the store to operate efficiently and to help identify new business solutions. Fourth, we do these things every day. Finally, we strive to generate strong profits; these profits produce the cash flow necessary to fund our growth and to support the needs of our customers.

SALES GROWTH

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

	2014				2013			2012
Net sales	$	3,733,507			3,326,106			3,133,577
Percentage change	12.2		%		6.1	%		13.3	%

The increase in net sales in both 2014 and 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 0.5% and 0.2% in 2014 and 2013, respectively. The added growth in 2014 was largely related to two things – the expansion, which began in the latter half of 2013, in the number of our store employees and the number of district and regional leaders supporting our stores, all in an effort to generate more selling energy within our stores, and a stabilization in our OEM fastener business.

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 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: 2014 group – opened 2004 and earlier, 2013 group – opened 2003 and earlier, and 2012 group – opened 2002 and earlier) and opened greater than five years ago (store sites opened as follows: 2014 group – opened 2009 and earlier, 2013 group – opened 2008 and earlier, and 2012 group – opened 2007 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: 2014 group – opened 2012 and earlier, 2013 group – opened 2011 and earlier, and 2012 group – opened 2010 and earlier). The daily sales change for each of these groups was as follows:

Store Age	2014		2013		2012
Opened greater than 10 years	10.5%		2.1%		8.1%
Opened greater than 5 years	10.9%		3.6%		9.8%
Opened greater than 2 years	11.5%		4.4%		10.8%

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

Stores opened in 2014 contributed approximately $9,762 (or 0.3%) to 2014 net sales. Stores opened in 2013 contributed approximately $52,033 (or 1.4%) to 2014 net sales and approximately $18,620 (or 0.6%) to 2013 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:

	2014		2013		2012
Fastener product line	40%		42%		44%
Other product lines	60%		58%		56%

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. Since we sell primarily non-fastener products in our industrial vending machines, this program has led 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

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, and also looking at the cumulative change from an earlier benchmark month) in our business. Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.

Monthly Sales Changes:

All company sales – During the months noted below, all of our selling locations, when combined, had daily sales growth rates of (compared to the same month in the preceding year):

	Jan.			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Nov.			Dec.
2014	6.7	%		7.7	%		11.6	%		10.0	%		13.5	%		12.7	%		14.7	%		15.0	%		12.9	%		14.6	%		15.3	%		17.4	%
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	%

Stores opened greater than two years – Our stores opened greater than two years (store sites opened as follows: 2014 group – opened 2012 and earlier, 2013 group – opened 2011 and earlier, and 2012 group – opened 2010 and earlier) represent a consistent 'same-store' view of our business. During the months noted below, the stores opened greater than two years had daily sales growth rates of (compared to the same month in the preceding year):

	Jan.			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Nov.			Dec.
2014	5.5	%		6.5	%		10.2	%		8.4	%		12.1	%		11.4	%		13.4	%		14.0	%		11.8	%		13.5	%		14.0	%		16.5	%
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	%

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: 2014 group – opened 2009 and earlier, 2013 group – opened 2008 and earlier, and 2012 group – opened 2007 and earlier). This group, which represented about 90% of our total sales in 2014, is more cyclical due to the increased market share they enjoy in their local markets. During the months noted below, the stores opened greater than five years had daily sales growth rates of (compared to the same month in the preceding year):

	Jan.			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Nov.			Dec.
2014	4.6	%		5.4	%		9.5	%		7.7	%		11.5	%		10.8	%		12.9	%		13.4	%		11.7	%		13.3	%		13.6	%		16.2	%
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	%

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 the years 2014, 2013, and 2012, it lowered our growth by 0.5%, 0.2%, and 0.1%, respectively.

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. The PMI Index is a composite index of economic activity in the United States manufacturing sector. It is published by the Institute for Supply Management and is available at http://www.ism.ws/. The fastener piece was heavily impacted by our industrial production business. 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 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 2013 impact was amplified due to poor weather conditions.

Our daily sales growth trends have generally improved since September 2013. This was largely related to changing comparisons to the prior year and to the improving sequential patterns noted in the next discussion. Our sales to customers engaged in light and medium duty manufacturing (largely related to consumer products) have improved since late 2013; this makes sense given the trends in the PMI Index since that time.

In the first quarter of 2014, our sales growth was hampered in January and February due to a weak economy and foreign exchange rate fluctuations (primarily related to the Canadian dollar); however, the biggest impact was a severe winter in North America and its negative impact on our customers and our trucking network. In March 2014, the weak economy and negative foreign exchange rate fluctuations continued; however, the weather normalized and our daily sales growth expanded to 11.6%. This double digit growth in March was helped by the Easter timing (April in 2014), but the real story is good people, good execution, and minimal negative weather impacts. Since March 2014, our double digit growth has continued. In the second quarter of 2014, the negative impact of the Easter timing was felt, and then a 'less noisy' picture emerged in May and June. 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, had a very weak 2013, but stabilized late in 2013 and has improved in 2014. Since May 2014, our stores opened greater than five years have enjoyed double digit growth in every month. This is a strong indicator of the strength of the marketplace.

Sequential Trends:

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

History has identified these landings in our business cycle. They generally relate to months with impaired business days (certain holidays). The first landing centers on Easter, which alternates between March and April (Easter occurred in April 2014, March 2013, and April 2012 – in 2015, Easter will occur in April), the second landing centers on July 4th, and the third landing centers on the approach of winter with its seasonal impact on primarily our construction business and with the Christmas/New Year holidays. The holidays we noted impact the trends because they either move from month-to-month or because they move around during the week (the July 4th and Christmas/New Year holiday impacts are examples).

The table below shows the pattern to the sequential change in our daily sales. The line labeled 'Benchmark' is an historical average of our sequential daily sales change for the period 1998 to 2013, excluding 2008 and 2009. We believe this time frame will serve to show the historical pattern and could serve as a benchmark for current performance. We excluded the 2008 to 2009 time frame because it contains an extreme economic event and we don't believe it is comparable. The '2014', '2013', and '2012' lines represent our actual sequential daily sales changes. The '14Delta', '13Delta', and '12Delta' lines indicate the difference between the 'Benchmark' and the actual results in the respective year.

	Jan.(1)			Feb.			Mar.			Apr.			May			June			July			Aug.			Sept.			Oct.			Cumulative Change from Jan. to Oct.
Benchmark	0.8	%		2.2	%		3.8	%		0.4	%		3.1	%		2.7	%		-2.1	%		2.5	%		3.7	%		-1.2	%		15.9%
2014	-1.4	%		3.0	%		7.1	%		-2.6	%		4.2	%		2.5	%		-3.8	%		5.8	%		1.0	%		-1.5	%		16.2%
14Delta	-2.2	%		0.8	%		3.3	%		-3.0	%		1.1	%		-0.2	%		-1.7	%		3.3	%		-2.7	%		-0.3	%		0.3%
2013	-0.4	%		2.0	%		3.4	%		-1.1	%		1.0	%		3.2	%		-5.5	%		5.5	%		2.9	%		-2.9	%		8.2%
13Delta	-1.2	%		-0.2	%		-0.4	%		-1.5	%		-2.1	%		0.5	%		-3.4	%		3.0	%		-0.8	%		-1.7	%		-7.7%
2012	-0.3	%		0.5	%		6.4	%		-0.8	%		0.5	%		2.5	%		-2.7	%		1.3	%		4.3	%		-4.8	%		7.1%
12Delta	-1.1	%		-1.7	%		2.6	%		-1.2	%		-2.6	%		-0.2	%		-0.6	%		-1.2	%		0.6	%		-3.6	%		-8.8%

(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
2014	9.0	%		11.2	%		13.7	%		13.8	%		12.0	%
2013	7.0	%		5.9	%		4.7	%		7.2	%		6.3	%
2012	20.3	%		15.8	%		14.0	%		9.7	%		14.9	%

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 is sometimes referred to as OEM - original equipment manufacturing) and the maintenance portion (this is business where we supply products that maintain the facility or the equipment of our customers engaged in manufacturing and is sometimes referred to as MRO - maintenance, repair, and other). 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 (approximately 40% of our business) which is heavily influenced by changes in our business with heavy equipment manufacturers (discussed earlier in this document). 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
2014	1.6	%		5.5	%		9.9	%		11.4	%		6.9	%
2013	1.7	%		1.9	%		1.0	%		1.9	%		1.6	%
2012	15.4	%		8.0	%		6.0	%		2.6	%		7.8	%

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
2014	14.2	%		17.1	%		17.6	%		19.0	%		17.2	%
2013	10.8	%		8.5	%		8.9	%		12.0	%		10.1	%
2012	25.1	%		21.1	%		18.0	%		13.6	%		19.2	%

The non-fastener business demonstrated greater relative resilience over the last several years, 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 was not immune to the impact of a weak industrial environment.

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
2014	2.9	%		7.5	%		9.3	%		12.6	%		7.8	%
2013	2.9	%		0.7	%		3.9	%		2.8	%		2.5	%
2012	17.1	%		12.7	%		8.2	%		4.2	%		10.3	%

We believe the weakness in the economy in the fourth quarter of 2012, throughout 2013, and during early 2014, particularly in the non-residential construction market, was amplified by global economic uncertainty combined with economic policy uncertainty in the United States. This weakness was amplified by severe winter weather conditions in January and February 2014.

A graph of the sequential daily sales trends to these two end markets in 2014, 2013, and 2012, 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

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

We grow by continuously adding customers and by increasing the activity with each customer. We believe this growth is enhanced by great people located in close proximity to our customers. This 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 began in the United States and 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 to fund our growth 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, we opened stores at an annual rate of approximately 1% to 8%. We opened 24 stores in 2014, an annual rate of approximately 1%, and currently expect to open approximately 20 to 30 stores in 2015, an annual rate similar to 2014.

During our almost 50 years of business existence, we have constantly evolved to better serve the market (as is described in the paragraphs below) and have always been willing to challenge our approach. In our first 20 to 25 years, we closed several store locations because we felt the market was insufficient to operate a profitable 'fastener only' business. Every one of those locations was subsequently ‘reopened’ when our business model evolved to serve these markets profitably. During the last 20 to 25 years, we have enjoyed continued success with our store-based model, and we continue to challenge our approach. Based on this approach, we have closed approximately 85 stores in the last ten years - not because they weren’t successful, but rather because we felt we had a better approach to growth. In the first six months of 2014, we continued to challenge our approach and closed about 20 stores (all but four of these locations were in close proximity to another Fastenal store). In the second quarter of 2014, we took a hard look at our business and identified another 45 stores to close in the second half of 2014 (all but eight of these locations were in close proximity to another Fastenal store). During the second half of 2014, we identified some additional stores for closure and closed 52 stores in total. Several items we think are noteworthy: the group of stores we identified for closure in the second half of 2014 was profitable in the first quarter of 2014 (our analysis measurement period); those stores operated with average sales of about $36 thousand per month. We chose to close this group because we felt this was simply a better approach to growing our business profitably.

There is a short-term price for closing these stores; and, since we believe we will maintain the vast majority of the sales associated with these locations and since most of the impacted employees have a nearby store from which to operate, the price primarily relates to the future commitments related to the leased locations. During the second quarter of 2014, we recorded the impaired future costs related to these commitments. The expense was not material as these locations have relatively short lease commitments and minimal leasehold improvements. We use the term closed; however, we consider them to be consolidated into another location since the vast majority are in close proximity to another store.

During the years, our expanding footprint has provided us with greater access to more customers, and we have 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 beyond primarily fasteners, and we added new product knowledge to our bench (the non-fastener products now represent about 60% 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) construction, (5) specific products (most recently metalworking), and (6) 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 twelve years ago and our 'Master Stocking Hub' initiative approximately seven 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 and 2014, we expanded our store based inventory offering around select industries (with an emphasis on fasteners, construction products, and safety products) and beginning 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. To improve the efficiency, accuracy, and capacity of our distribution centers, we made significant investments into distribution automation over the last several years (a majority of our facilities are now automated, and greater than 80% of our picking occurs at an automated distribution center). Finally, our high frequency distribution center, internally known as T-HUB, is now operational to support vending and other high frequency selling activities. The theme that shines through in all these changes is a simple one – invest into and support our sales machine – the local store.

Over the last several years, our FAST Solutions® (industrial vending) operation has been an expanding component of our store-based 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. Given this, we have been investing to maximize the advantage.

Our expanded industrial vending portfolio consists of 19 different vending devices, with the FAST 5000 device, our helix based machine (think candy machine), representing approximately 40% of the installed machines. We have learned much about these devices over the last several years and currently have target monthly revenue ranging from under $1,000 to in excess of $3,000

per device. The following two tables provide two views of our data: (1) actual device count regardless of the type of machine and (2) ‘machine equivalent' count based on the weighted target monthly revenue of each device (compared to the FAST 5000 device, which has a $2,000 monthly revenue target). For example, the 12-door locker, with target monthly revenue of $750, would be counted as ‘0.375 machine equivalent’ (0.375 = $750/$2,000).

The industrial vending information related to contracts signed during each period was as follows:

			Q1			Q2			Q3			Q4			Annual
Device count signed during the period	2014		4,025			4,137			4,072			4,108			16,342
	2013		6,568			6,084			4,836			4,226			21,714
	2012		6,646			6,818			7,871			6,715			28,050
	2011		1,812			2,710			2,930			2,753			10,205
'Machine equivalent' count signed during the period	2014		2,974			3,179			3,189			3,243			12,585
	2013		4,825			4,505			3,656			3,244			16,230
	2012		3,827			3,926			4,581			4,739			17,073
	2011		1,264			1,915			2,035			1,880			7,094

The industrial vending information related to installed machines at the end of each period was as follows:

			Q1			Q2			Q3			Q4
Device count installed at the end of the period	2014		42,153			43,761			45,596			46,855
	2013		32,007			36,452			39,180			40,775
	2012		12,600			16,964			21,998			26,975
	2011		3,227			4,793			7,062			9,462
'Machine equivalent' count installed at the end of the	2014		30,326			31,713			33,296			34,529
period	2013		22,020			25,512			27,818			29,262
	2012		8,842			11,604			14,880			18,395
	2011		2,462			3,548			5,154			6,771

The following table includes some additional statistics regarding our sales and sales growth:

			Q1			Q2			Q3			Q4
Percent of total net sales to customers with	2014		37.8	%		37.0	%		37.8	%		39.3	%
industrial vending1	2013		27.5	%		30.0	%		33.3	%		36.6	%
	2012		17.8	%		20.8	%		23.2	%		25.8	%
	2011		8.9	%		10.5	%		13.1	%		15.7	%
Daily sales growth to customers with	2014		19.7	%		20.9	%		21.9	%		20.0	%
industrial vending2	2013		23.9	%		18.9	%		15.2	%		18.7	%
	2012		33.9	%		34.3	%		32.9	%		28.6	%
	2011		50.6	%		43.9	%		42.5	%		40.7	%

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

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

In addition to the industrial vending operation noted above, which primarily relates to our non-fastener business, we also provide bin stock programs (also known as ‘keep fill’ programs in the industry) to numerous customers with respect to our fastener business. This business, which relates to both our maintenance customers (MRO fasteners and non-fasteners) and original equipment manufacturers (OEM fasteners), has many similar attributes to our industrial vending relationships. These attributes include a strong relationship with these customers, where we are often their preferred supplier, and a frequent level of business transactions. This business is performed without the aid of a vending machine, but does make use of the latest

scanning technologies, scale systems, and our fully integrated distribution network to manage the supply chain for all sizes of customers. In recent years, we have begun to refer to this business as FMI (Fastenal Managed Inventory).

PROFIT DRIVERS OF OUR BUSINESS

As we state several times in this document, profit is important to us. For a distribution business profit and cash flow go hand in hand, and this 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 improving our gross profit, by structurally lowering our operating expenses, or both. Measured as a percentage of sales, the gross profit component generally decreases as the average monthly sales increase. This is due to the mix impact of larger customers. However, typically the operating expense component improves more as the average monthly sales increase, which paves our 'pathway to profit'. In most years we advance on this 'pathway to profit' by increasing our 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 the last three years, were as follows:

Sales per Month		Average Age (Years)			Number of Stores			Percentage of Stores			Pre-Tax Earnings Percentage
Three months ended December 31, 2014		Average monthly store sales = $101,608
$0 to $30,000		5.3			135			5.1	%		-8.7	%
$30,001 to $60,000		8.9			646			24.5	%		11.6	%
$60,001 to $100,000		11.0			790			30.0	%		19.3	%
$100,001 to $150,000		13.0			501			19.0	%		23.2	%
Over $150,000		16.2			421			16.0	%		25.9	%
Strategic Account/Overseas Stores					144			5.5	%
Company Total					2,637			100.0	%		20.4	%
Three months ended December 31, 2013					Average monthly 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 monthly 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	%

Note – Amounts may not foot due to rounding difference, and dollar amounts in this section are presented in whole dollars, not thousands.

We originally announced the 'pathway to profit' in 2007, and discussed the profit improvement we envisioned as the average store size grows. Today, the five groups of stores listed above represent about 80% of our sales, with the remaining 20% coming from our Strategic Account/Overseas stores, our dedicated 'in-plant' business (where we set up a business at a customer's site), our direct import business, and our direct manufacturing business.

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 document. 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 net 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 for each were as follows for the first quarter of 2007 (the last completed quarter before we began the 'pathway to profit') and for each of the last five quarters:

	Q1 2007			Q4 2013			Q1 2014			Q2 2014			Q3 2014			Q4 2014
Total net sales reported	$489,157			$813,760			$876,501			$949,938			$980,814			$926,254
Less: non-store sales (approximate)	40,891			105,499			113,945			125,509			129,841			122,006
Store net sales (approximate)	$448,266			$708,261			$762,556			$824,429			$850,973			$804,248
% change since Q1 2007				58.0	%		70.1	%		83.9	%		89.8	%		79.4	%
% change (twelve months)				7.1	%		8.2	%		11.7	%		13.5	%		13.6	%
Percentage of sales through a store	92	%		87	%		87	%		87	%		87	%		87	%
Average monthly sales per store	$72			$88			$95			$102			$107			$102
(using ending store count)
% change since Q1 2007				22.2	%		31.9	%		41.7	%		48.6	%		41.7	%
% change (twelve months)				6.0	%		8.0	%		10.9	%		15.1	%		15.9	%
Company pre-tax earnings percentage	18.1	%		19.3	%		20.4	%		21.8	%		21.7	%		20.4	%

	Q1 2007			Q4 2013			Q1 2014			Q2 2014			Q3 2014			Q4 2014
Store locations - quarter end count	2,073			2,687			2,683			2,684			2,647			2,637
% change since Q1 2007				29.6	%		29.4	%		29.5	%		27.7	%		27.2	%
% change (twelve months)				1.3	%		0.9	%		0.3	%		-1.5	%		-1.9	%
Store personnel - absolute headcount	6,849			11,261			11,775			11,958			12,123			12,274
% change since Q1 2007				64.4	%		71.9	%		74.6	%		77.0	%		79.2	%
% change (twelve months)				8.8	%		16.5	%		17.7	%		14.3	%		9.0	%
Store personnel - FTE	6,383			9,771			10,206			10,446			10,715			10,376
Non-store selling personnel - FTE	616			1,214			1,236			1,276			1,357			1,335
Subtotal of all sales personnel - FTE	6,999			10,985			11,442			11,722			12,072			11,711
Distribution personnel - FTE	1,646			2,040			2,076			2,139			2,198			2,207
Manufacturing personnel - FTE 1	316			581			617			642			648			632
Administrative personnel - FTE	767			876			905			924			948			962
Subtotal of non-sales personnel - FTE	2,729			3,497			3,598			3,705			3,794			3,801
Total - average FTE headcount	9,728			14,482			15,040			15,427			15,866			15,512
% change since Q1 2007
Store personnel - FTE				53.1	%		59.9	%		63.7	%		67.9	%		62.6	%
Non-store selling personnel - FTE				97.1	%		100.6	%		107.1	%		120.3	%		116.7	%
Subtotal of all sales personnel - FTE				57.0	%		63.5	%		67.5	%		72.5	%		67.3	%
Distribution personnel - FTE				23.9	%		26.1	%		30.0	%		33.5	%		34.1	%
Manufacturing personnel - FTE 1				83.9	%		95.3	%		103.2	%		105.1	%		100.0	%
Administrative personnel - FTE				14.2	%		18.0	%		20.5	%		23.6	%		25.4	%
Subtotal of non-sales personnel - FTE				28.1	%		31.8	%		35.8	%		39.0	%		39.3	%
Total - average FTE headcount				48.9	%		54.6	%		58.6	%		63.1	%		59.5	%
% change (twelve months)
Store personnel - FTE				8.1	%		15.0	%		16.8	%		14.6	%		6.2	%
Non-store selling personnel - FTE				13.5	%		10.3	%		8.7	%		14.0	%		10.0	%
Subtotal of all sales personnel - FTE				8.7	%		14.5	%		15.9	%		14.5	%		6.6	%
Distribution personnel - FTE				9.0	%		14.1	%		14.6	%		10.7	%		8.2	%
Manufacturing personnel - FTE 1				6.8	%		9.2	%		12.2	%		13.7	%		8.8	%
Administrative personnel - FTE				8.0	%		8.8	%		7.8	%		9.3	%		9.8	%
Subtotal of non-sales personnel - FTE				8.4	%		11.9	%		12.4	%		10.8	%		8.7	%
Total - average FTE headcount				8.6	%		13.8	%		15.0	%		13.6	%		7.1	%

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
		2014			2013			2012
Net sales		100.0	%		100.0	%		100.0	%
Gross profit		50.8	%		51.7	%		51.5	%
Operating and administrative expenses		29.8	%		30.3	%		30.0	%
Gain on sale of property and equipment		0.0	%		0.0	%		0.0	%
Operating income		21.1	%		21.4	%		21.5	%
Net interest income (expense)		0.0	%		0.0	%		0.0	%
Earnings before income taxes		21.1	%		21.5	%		21.5	%
Note – Amounts may not foot due to rounding difference.

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

		Q1			Q2			Q3			Q4
2014		51.2	%		50.8	%		50.8	%		50.5	%
2013		52.3	%		52.2	%		51.7	%		50.6	%
2012		51.3	%		51.6	%		51.6	%		51.6	%

We believe a normal gross profit percentage for our business is around 51% and constantly strive to operate in a range of 51% to 52% (see also the discussion under the caption ‘BUSINESS UPDATE’ earlier in this document). This is based on our current mix of store sizes, products, geographies, end markets, and end market uses (such as industrial production business versus maintenance business).

Historically, our gross profit percentages fluctuate due to impacts related to (1) transactional gross profit (either related to product and customer mix or to freight), (2) organizational gross profit (sourcing strength that can occur as we leverage buying scale and efficiency), and (3) supplier incentive gross profit (impacts from supplier 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. The transactional gross profit, our most meaningful component, is heavily influenced by our store-based compensation programs, which are directly linked to sales growth and gross profit, and incentivize our employees to improve both.

An important aspect of our gross profit relates to our locations, our product mix, and our customer mix. Given the close proximity of our sales personnel to our customer’s business, we offer a very high service level with our sales, which is valued by our customers and improves our gross profit. Fasteners are our highest gross profit product line given the high transaction cost surrounding the sourcing and supply of the product for our customers. Fasteners currently account for approximately 40% of our sales. We expect any reduction in the mix of our sales attributable to fasteners to negatively impact gross profit, particularly as it relates to maintenance fasteners. Gross profit is also influenced by average store sales as noted earlier in this document. Larger stores have larger customers, whose more focused buying patterns allow us to offer them better pricing. As a result, growth in average store sales is expected to negatively impact gross profit. A final item of note, our fourth quarter has typically been the season with the most challenges surrounding gross profit. This relates to the decline in sales in November and December due to the ‘holiday season’ and due to the drop off in non-residential construction business. This drop off in sales reduces the utilization of our trucking network and can slightly reduce our gross profit.

During the year and fourth quarter of 2014, our gross profit dropped below 51%. The drop generally centered on transactional impacts driven by product and customer mix, our strong emphasis on growing average store sales and, with respect to the fourth quarter, on the seasonality described above.

Operating and administrative expenses - as a percentage of sales improved nominally from 2013 to 2014.

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 same periods in the preceding year):

		Twelve-month Period
		2014			2013			2012
Employee related expenses		11.7	%		4.6	%		10.1	%
Occupancy related expenses		6.9	%		11.2	%		4.8	%
Selling transportation costs		10.1	%		0.8	%		10.1	%

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. For 2014, when compared to 2013, (1) our performance bonuses and commissions grew due to our expanding sales growth from the past year, (2) our profit sharing contribution contracted due to lower relative profitability, and (3) our health care costs grew. These factors, combined with an increase in full-time equivalent headcount (see table below), caused employee related costs to grow. For 2013, when compared to 2012, performance bonuses were down (other than those related to our vending business); however, this decrease was offset by increases related to the following factors: (1) increases in full-time equivalent headcount, (2) sales commissions grew due to 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 a change in the pace of the vending rollout, (4) our profit sharing contribution grew, and (5) our health care costs grew.

On average, the full-time equivalent headcount grew as follows (compared to the same period in the preceding years):

	2014			2013			2012
Store based	12.5	%		2.3	%		8.2	%
Total selling (includes store)	12.3	%		3.3	%		9.2	%
Distribution	11.5	%		4.3	%		5.5	%
Manufacturing	10.7	%		6.0	%		8.7	%
Total headcount	11.9	%		3.8	%		8.2	%

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 2014, when compared to 2013, was driven by (1) an increase in the amount of FAST Solutions® (industrial vending) equipment as discussed earlier in this document, (2) an increase in building utility cost due to a severe winter in January and February 2014 and increases in natural gas prices during the 2014 heating season, (3) an increased investment in our distribution infrastructure over the last several years, primarily related to automation, and (4) an accrual related to store closings. The increase in 2013, when compared to 2012, 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 costs, (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 2014 and 2013, the industrial vending component represented approximately 45% and 60%, respectively, of the increase.

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 grew in 2014, when compared to 2013. This was driven by the increase in store headcount and the reduction in mileage per gallon associated with severe winter driving conditions. 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 relative vehicle ownership costs.

The last several years have seen some variation in the cost of diesel fuel and gasoline – During the first, second, third, and fourth quarters of 2014, our total vehicle fuel costs were approximately $11.9, $12.5, $11.5, and $9.5 million, respectively. 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. 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, changes in the number of other sales centered vehicles as a result of store openings and the expansion of our non-store sales force, and changes in driving conditions. 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).

Income taxes – Income taxes, as a percentage of earnings before income taxes, were approximately 37.2% and 37.1% for 2014 and 2013, respectively. Our income tax rate increased slightly from 2013 to 2014. However, as our international business and profits grow over time, the lower income tax rates in those jurisdictions, relative to the United States, have generally 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	2014				2013			2012
Net earnings	$	494,150			448,636			420,536
Basic EPS	1.67				1.51			1.42
Diluted EPS	1.66				1.51			1.42
Percentage Change	2014				2013			2012
Net earnings	10.1		%		6.7	%		17.5	%
Basic EPS	10.6		%		6.3	%		17.4	%
Diluted EPS	9.9		%		6.3	%		17.4	%

During 2014, the net earnings increase was less than that of sales primarily due to the reduction in the gross profit percent realized. During 2013, the net earnings increase was greater than that of sales primarily due to the expansion in the gross profit percent 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.

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	2014				2013
Accounts receivable, net	$	47,746			42,172
Inventories	85,156				68,685
Operational working capital	$	132,902			110,857
Annual percentage change	2014				2013
Accounts receivable, net	11.5		%		11.3	%
Inventories	10.9		%		9.6	%
Operational working capital	11.1		%		10.2	%

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. While all of these items impacted both 2014 and 2013, items (3) through (8) had the greatest impact.

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, 2014 and 2013, we had a ratio of 2.8:1.

ACQUISITION

On October 1, 2014 we acquired certain assets of Av-Tech Industries, Inc., a wholesale distributor of aerospace fasteners, electronic components, and miscellaneous aircraft parts. The business did not have a meaningful impact on our 2014 financial results (there were some balance sheet impacts of the all-cash acquisition, as noted in our consolidated statements of cash flows). The acquisition is not expected to have a material impact on our overall net sales in 2015.

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:

	2014				2013			2012
Net cash provided	$	499,392			416,120			396,292
% of net earnings	101.1		%		92.8	%		94.2	%

The increases in the net cash provided in each of the three years was primarily due to increases in earnings.

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

	2014			2013			2012
Store	56	%		58	%		56	%
Distribution center	44	%		42	%		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:

	2014				2013			2012
Net cash used	$	188,781			201,792			107,204
% of net earnings	38.2		%		45.0	%		25.5	%

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 (purchases of property and equipment, less proceeds from the sale of property and equipment) in dollars and as a percentage of net earnings were as follows:

	2014				2013			2012
Net capital expenditures	$	183,655			201,550			133,882
% of net earnings	37.2		%		44.9	%		31.8	%

The net capital expenditures increased from 2012 to 2013, and then decreased in 2014. The increase in 2013 was primarily caused by the dramatic increase in the number of FAST Solutions® (industrial vending) machines deployed in our business, and by the expanded use of automation within our distribution centers. The decrease in 2014 was largely related to the completion of distribution automation projects in 2013.

Property and equipment expenditures in 2014, 2013, and 2012 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, and the construction of a new centralized distribution facility (2014 and 2013), and (8) costs related to the expansion of our distribution centers in Winona, Minnesota (2012), Akron, Ohio (2013), Atlanta, Georgia (2013), Scranton, Pennsylvania (2014 and 2013), Kitchener, Ontario, Canada (2014 and 2013), Modesto, California (2014), 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 2015 net capital expenditures and a recap of our 2014, 2013, and 2012 net capital expenditures.

	2015				2014			2013			2012
Net Capital Expenditures	(Estimate)				(Actual)			(Actual)			(Actual)
Manufacturing, warehouse and packaging equipment, industrial vending equipment, and facilities	$	108,400			144,649			164,940			105,278
Shelving and related supplies for store openings and for product expansion at existing stores	8,300				6,712			6,354			5,240
Data processing software and equipment	28,800				23,978			12,652			11,102
Real estate and improvements to store locations	4,000				4,091			9,603			6,014
Vehicles	14,500				10,044			12,991			10,772
Proceeds from sale of property and equipment	(9,500		)		(5,819	)		(4,990	)		(4,524	)
	$	154,500			183,655			201,550			133,882

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 needed to expand our FAST Solutions® (industrial vending) business, to increase the use of automation in our distribution centers, and to fund the large dividend payout late in 2012, we established a $125,000 unsecured credit facility in December 2012. In 2014, we increased the total size of the credit facility in order to help fund our expansion plans and additional purchases of our common stock. The total commitment of the lenders to make loans and issue letters of credit under the credit facility is currently $230,000. We also increased the size of the letter of credit subfacility to $45,000 and extended the maturity date of the credit facility to December 2016. During the first, second, third, and fourth quarters of 2014, our borrowings under the credit facility peeked at $85,000, $115,000, $160,000, and $155,000, respectively. At year end, we had loans outstanding under the credit facility of $90,000 and undrawn letters of credit outstanding under the credit facility in an aggregate face amount of $37,315.

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				2015			2016 and 2017			2018 and 2019			After 2019
Facilities and equipment	$	231,200			92,333			106,440			30,505			1,922
Vehicles	47,186				23,991			22,018			1,177			—
Total	$	278,386			116,324			128,458			31,682			1,922

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

	2014				2013			2012
Net cash used	$	249,732			234,443			327,513
% of net earnings	50.5		%		52.3	%		77.9	%

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 and related tax impact of stock options, and net borrowings under the credit facility. These items in dollars and as a percentage of earnings were as follows:

	2014				2013				2012
Dividends paid	$	296,581			237,456				367,306
% of net earnings	60.0		%		52.9		%		87.3	%
Stock purchases	52,942				9,080				—
% of net earnings	10.7		%		2.0		%		—	%
Total returned to shareholders	$	349,523			246,536				367,306
% of net earnings	70.7		%		54.9		%		87.3	%
Proceeds from the exercise of stock options and the related excess tax benefits of stock-based compensation	$	(9,791	)		$	(12,093	)		(39,793	)
% of net earnings	(2.0		)%		(2.6		)%		(9.4	)%
Cash borrowings, net	$	(90,000	)		—				—
% of net earnings	(18.2		)%		—		%		—	%
Net impact to net cash used	$	249,732			234,443				327,513
% of net earnings	50.5		%		52.3		%		77.9	%

Stock Purchases— During 2014, we purchased 1,200,000 shares of our common stock at an average price of approximately $44.12 per share. 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. On January 14, 2015, our board of directors increased the maximum number of shares that may yet be purchased to 2,000,000 shares.

Dividends — We declared a dividend of $0.28 per share on January 14, 2015. We paid aggregate annual dividends per share of $1.00, $0.80, and $1.24 in 2014, 2013, and 2012, 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 2014 and 2013. At the product level, we experienced some deflation in our fastener products and limited to slight inflation in our non-fastener products in 2014 and 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. Although we believe our reserve is adequate, the results could be materially different if our assumptions and historical trends do not reflect actual results.

Inventory reserves – The reserves are for potentially obsolete or excess inventory and shrinkage. The reserves are 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. Although we believe our reserves are adequate, the results could be materially different if our assumptions and 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. Although we believe our reserve is adequate, the results could be materially different if our assumptions and 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. Although we believe our reserve is adequate, the results could be materially different if our assumptions and 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 to be 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 of loss 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 Note 10 of the 'Notes to 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 'Forward-Looking Statements' and 'Item 1A. Risk Factors'.