Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Fastenal Company:

We have audited the accompanying consolidated balance sheets of Fastenal Company and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in the table of contents at Item 15. We also have audited the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Fastenal Company’s management is responsible for these consolidated financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fastenal Company and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, Fastenal Company and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

/s/ KPMG LLP

Minneapolis, Minnesota

February 5, 2016

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in thousands except share information)

	December 31
	2015				2014
Assets
Current assets:
Cash and cash equivalents	$	129,019			114,496
Trade accounts receivable, net of allowance for doubtful accounts of $11,729 and $12,619, respectively	468,375				462,077
Inventories	913,263				869,224
Deferred income tax assets	—				21,765
Prepaid income taxes	22,558				—
Other current assets	131,561				115,703
Total current assets	1,664,776				1,583,265
Property and equipment, net	818,889				763,889
Other assets, net	48,797				11,948
Total assets	$	2,532,462			2,359,102
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of debt	$	62,050			90,000
Accounts payable	125,973				103,909
Accrued expenses	185,143				174,002
Income taxes payable	—				7,442
Total current liabilities	373,166				375,353
Long-term debt	302,950				—
Deferred income tax liabilities	55,057				68,532
Commitments and contingencies (Notes 4, 8, and 9)
Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized	—				—
Common stock, 400,000,000 shares authorized, 289,581,682 and 295,867,844 shares issued and outstanding, respectively	2,896				2,959
Additional paid-in capital	2,024				33,744
Retained earnings	1,842,772				1,886,350
Accumulated other comprehensive (loss) income	(46,403		)		(7,836	)
Total stockholders’ equity	1,801,289				1,915,217
Total liabilities and stockholders’ equity	$	2,532,462			2,359,102

See accompanying Notes to Consolidated Financial Statements.

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Earnings

(Amounts in thousands except earnings per share)

For the year ended December 31

	2015				2014			2013
Net sales	$	3,869,187			3,733,507			3,326,106
Cost of sales	1,920,253				1,836,105			1,606,661
Gross profit	1,948,934				1,897,402			1,719,445
Operating and administrative expenses	1,121,590				1,110,776			1,007,431
Gain on sale of property and equipment	(1,411		)		(964	)		(643	)
Operating income	828,755				787,590			712,657
Interest income	373				759			924
Interest expense	(3,108		)		(915	)		(113	)
Earnings before income taxes	826,020				787,434			713,468
Income tax expense	309,659				293,284			264,832
Net earnings	$	516,361			494,150			448,636
Basic net earnings per share	$	1.77			1.67			1.51
Diluted net earnings per share	$	1.77			1.66			1.51
Basic weighted average shares outstanding	291,453				296,490			296,754
Diluted weighted average shares outstanding	292,045				297,313			297,684

See accompanying Notes to Consolidated Financial Statements.

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Amounts in thousands)

For the year ended December 31

	2015				2014			2013
Net earnings	$	516,361			494,150			448,636
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments (net of tax of $0 in 2015, 2014, and 2013)	(38,567		)		(18,683	)		(7,354	)
Change in marketable securities (net of tax of $0 in 2015, 2014, and 2013)	—				(254	)		98
Comprehensive income	$	477,794			475,213			441,380

See accompanying Notes to Consolidated Financial Statements.

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Amounts in thousands)

	Common Stock
	Shares			Amount				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance as of December 31, 2012	296,564			$	2,966			61,436			1,477,601			18,357			1,560,360
Dividends paid in cash	—			—				—			(237,456	)		—			(237,456	)
Purchases of common stock	(200	)		(2		)		(9,078	)		—			—			(9,080	)
Stock options exercised	389			4				9,302			—			—			9,306
Stock-based compensation	—			—				5,400			—			—			5,400
Excess tax benefits from stock-based compensation	—			—				2,787			—			—			2,787
Net earnings	—			—				—			448,636			—			448,636
Other comprehensive income (loss)	—			—				—			—			(7,256	)		(7,256	)
Balance as of December 31, 2013	296,753			$	2,968			69,847			1,688,781			11,101			1,772,697
Dividends paid in cash	—			—				—			(296,581	)		—			(296,581	)
Purchases of common stock	(1,200	)		(12		)		(52,930	)		—			—			(52,942	)
Stock options exercised	315			3				7,694			—			—			7,697
Stock-based compensation	—			—				7,039			—			—			7,039
Excess tax benefits from stock-based compensation	—			—				2,094			—			—			2,094
Net earnings	—			—				—			494,150			—			494,150
Other comprehensive income (loss)	—			—				—			—			(18,937	)		(18,937	)
Balance as of December 31, 2014	295,868			$	2,959			33,744			1,886,350			(7,836	)		1,915,217
Dividends paid in cash	—			—				—			(327,101	)		—			(327,101	)
Purchases of common stock	(7,100	)		(71		)		(60,042	)		(232,838	)		—			(292,951	)
Stock options exercised	814			8				19,091			—			—			19,099
Stock-based compensation	—			—				5,841			—			—			5,841
Excess tax benefits from stock-based compensation	—			—				3,390			—			—			3,390
Net earnings	—			—				—			516,361			—			516,361
Other comprehensive income (loss)	—			—				—			—			(38,567	)		(38,567	)
Balance as of December 31, 2015	289,582			$	2,896			2,024			1,842,772			(46,403	)		1,801,289

See accompanying Notes to Consolidated Financial Statements.

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in thousands)

For the year ended December 31

	2015				2014			2013
Cash flows from operating activities:
Net earnings	$	516,361			494,150			448,636
Adjustments to reconcile net earnings to net cash provided by operating activities, net of acquisitions:
Depreciation of property and equipment	86,071				72,145			63,770
Gain on sale of property and equipment	(1,411		)		(964	)		(643	)
Bad debt expense	8,769				11,480			9,421
Deferred income taxes	8,290				1,760			8,129
Stock-based compensation	5,841				7,039			5,400
Excess tax benefits from stock-based compensation	(3,390		)		(2,094	)		(2,787	)
Amortization of non-compete agreements	527				527			421
Changes in operating assets and liabilities, net of acquisitions:
Trade accounts receivable	(20,608		)		(63,418	)		(51,593	)
Inventories	(47,830		)		(87,622	)		(68,685	)
Other current assets	(15,778		)		(7,510	)		(10,627	)
Accounts payable	20,617				12,501			13,234
Accrued expenses	11,141				25,263			22,424
Income taxes	(26,610		)		34,405			(14,714	)
Other	4,950				1,730			(6,266	)
Net cash provided by operating activities	546,940				499,392			416,120
Cash flows from investing activities:
Purchases of property and equipment	(155,168		)		(189,474	)		(206,540	)
Cash paid for acquisitions	(23,493		)		(5,575	)		—
Proceeds from sale of property and equipment	9,941				5,819			4,990
Net decrease (increase) in marketable securities	—				451			(97	)
Other	(11,907		)		(2	)		(145	)
Net cash used in investing activities	(180,627		)		(188,781	)		(201,792	)
Cash flows from financing activities:
Borrowings under credit facility	1,215,000				705,000			260,000
Payments against credit facility	(955,000		)		(615,000	)		(260,000	)
Proceeds from exercise of stock options	19,099				7,697			9,306
Excess tax benefits from stock-based compensation	3,390				2,094			2,787
Purchases of common stock	(292,951		)		(52,942	)		(9,080	)
Payments of dividends	(327,101		)		(296,581	)		(237,456	)
Net cash used in financing activities	(337,563		)		(249,732	)		(234,443	)
Effect of exchange rate changes on cash and cash equivalents	(14,227		)		(4,889	)		(990	)
Net increase in cash and cash equivalents	14,523				55,990			(21,105	)
Cash and cash equivalents at beginning of year	114,496				58,506			79,611
Cash and cash equivalents at end of year	$	129,019			114,496			58,506
Supplemental disclosure of cash flow information:
Cash paid during each year for interest	$	3,103			915			113
Net cash paid during each year for income taxes	$	327,034			257,514			270,615

See accompanying Notes to Consolidated Financial Statements.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements

Note 1. Business Overview and Summary of Significant Accounting Policies

Business Overview

Fastenal is a leader in the wholesale distribution of industrial and construction supplies operating a store-based business with approximately 2,600 locations. These locations are primarily in North America.

Principles of Consolidation

The consolidated financial statements include the accounts of Fastenal Company and its subsidiaries (collectively referred to as ‘Fastenal’ or by terms such as ‘we’, ‘our’, or ‘us’). All material intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition and Accounts Receivable

Net sales include products, services, and shipping and handling charges billed, net of any related sales incentives, and net of an estimate for product returns. We recognize revenue when persuasive evidence of an arrangement exists, title and risk of ownership have passed, the sales price is fixed or determinable, and collectibility is reasonably assured. These criteria are met at the time the product is shipped to or picked up by the customer. We recognize services at the time the service is completed and product is provided to the customer. We recognize revenue for shipping and handling charges billed at the time the products are shipped to or picked up by the customer. We estimate product returns based on historical return rates. Accounts receivable are stated at their estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts and our historical experience with accounts receivable write-offs. Sales taxes (and value added taxes in foreign jurisdictions) collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.

Foreign Currency Translation and Transactions

The functional currency of our foreign operations is typically the applicable local currency. The functional currency is translated into United States dollars for balance sheet accounts, except retained earnings, using current exchange rates as of the balance sheet date, for retained earnings at historical exchange rates, and for revenue and expense accounts using a weighted average exchange rate during the period. The translation adjustments are deferred as a separate component of stockholders’ equity captioned accumulated other comprehensive (loss) income. Gains or losses resulting from transactions denominated in foreign currencies are included in operating and administrative expenses.

Cash and Cash Equivalents

We consider all investments purchased with original maturities of three months or less to be cash equivalents.

Financial Instruments and Marketable Securities

All financial instruments are carried at amounts that approximate fair value. The fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. Assets measured at fair value are categorized based upon the lowest level of significant input to the valuations. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. Level 3 inputs are unobservable inputs based upon our own assumptions used to measure assets and liabilities at fair value. In determining fair value we use observable market data when available.

Due to the varying short-term cash needs of our business, we periodically have available-for-sale marketable securities. We did not have any marketable securities as of December 31, 2015 or December 31, 2014. Available-for-sale securities are recorded at fair value based on current market value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings but are included in comprehensive income and are reported as a separate component of stockholders’ equity until realized, unless a decline in the market value of any available-for-sale security is below cost, then the amount is deemed other than temporary and is charged to net earnings, resulting in the establishment of a new cost basis for the security.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Inventories

Inventories, consisting of finished goods merchandise held for resale, are stated at the lower of cost (first in, first out method) or market.

Property and Equipment

Property and equipment are stated at cost. Depreciation on property and equipment is provided for using the straight-line method over the anticipated economic useful lives of the related property. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by the asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. There were no impairments recorded during any of the three years reported in these consolidated financial statements.

Leases

We lease space under operating leases for certain distribution centers, stores, and manufacturing locations. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Any such terms are recognized as rent expense over the term of the lease. Further, the leases do not contain contingent rent provisions. Leasehold improvements on operating leases are amortized over their estimated service lives on a straight-line basis, or the remaining lease term, whichever is shorter. We lease certain semi-tractors, pick-ups, and equipment under operating leases.

Other Long-Lived Assets

Other assets consist of prepaid deposits, goodwill, non-compete agreements, and other related intangible assets. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is reviewed for impairment annually. The non-compete and related intangible assets are amortized on a straight-line basis over their estimated life.

Accounting Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Insurance Reserves

We are self-insured for certain losses relating to medical, dental, workers’ compensation, and other casualty losses. Specific stop loss coverage is provided for catastrophic claims in order to limit exposure to significant claims. Losses and claims are charged to operations when it is probable a loss has been incurred and the amount can be reasonably estimated. Accrued insurance liabilities are based on claims filed but unpaid and estimates of claims incurred but not reported.

Product Warranties

We offer a basic limited warranty for certain of our products. The specific terms and conditions of those warranties vary depending upon the product sold. We typically recoup these costs through product warranties we hold with the original equipment manufacturers. Our warranty expense has historically been minimal.

Stock-Based Compensation

We estimate the value of stock option grants using a Black-Scholes valuation model. Stock-based compensation expense is recognized on a straight-line basis over the vesting period. Our stock-based compensation expense is recorded in operating and administrative expenses.

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

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Income Taxes

We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits in income tax expense.

Earnings Per Share

Basic net earnings per share is calculated using net earnings available to common stockholders divided by the weighted average number of shares of common stock outstanding during the year. Diluted net earnings per share is similar to basic net earnings per share except that the weighted average number of shares of common stock outstanding includes the incremental shares assumed to be issued upon the exercise of stock options considered to be ‘in-the-money’ (i.e. when the market price of our stock is greater than the exercise price of our outstanding stock options).

Segment Reporting

We have determined that we meet the aggregation criteria outlined in the accounting standards as our various operations have similar (1) economic characteristics, (2) products and services, (3) customers, (4) distribution channels, and (5) regulatory environments. Therefore, we report as a single business segment.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Note 2. Long-Lived Assets

Property and equipment

Property and equipment at year end consisted of the following:

	Depreciable Life in Years			2015				2014
Land	—			$	37,671			36,511
Buildings and improvements	15 to 40			271,302				224,365
Automated storage and retrieval equipment	5 to 30			139,101				116,127
Equipment and shelving	3 to 10			614,528				519,635
Transportation equipment	3 to 5			61,429				59,459
Construction in progress	—			200,892				237,637
				1,324,923				1,193,734
Less accumulated depreciation				(506,034		)		(429,845	)
Property and equipment, net				$	818,889			763,889

Note 3. Accrued Expenses

Accrued expenses at year end consisted of the following:

	2015				2014
Payroll and related taxes	$	24,407			21,928
Bonuses and commissions	15,441				20,910
Profit sharing contribution	13,669				11,460
Insurance	31,821				31,137
Promotions	25,261				23,224
Sales, real estate, and personal property taxes	66,563				58,716
Deferred revenue	2,875				3,125
Legal reserves	1,930				1,684
Other	3,176				1,818
Accrued expenses	$	185,143			174,002

Note 4. Stockholders’ Equity

Our authorized, issued, and outstanding shares (stated in whole numbers) at year end consisted of the following:

	Par Value		2015			2014
Preferred stock	$0.01/share
Shares authorized			5,000,000			5,000,000
Shares issued and outstanding			—			—
Common stock	$0.01/share
Shares authorized			400,000,000			400,000,000
Shares issued and outstanding			289,581,682			295,867,844

Dividends

On January 14, 2016, our board of directors declared a quarterly dividend of $0.30 per share of common stock to be paid in cash on February 26, 2016 to shareholders of record at the close of business on January 29, 2016. We paid aggregate annual dividends per share of $1.12, $1.00, and $0.80 in 2015, 2014, and 2013, respectively.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Stock Purchases

Subsequent to December 31, 2015, we have purchased 1,600,000 shares of our common stock at an average price of approximately $37.15 per share.

Stock Options

The following tables summarize the details of grants made under our stock option plan that are still outstanding, and the assumptions used to value these grants. All options granted were effective at the close of business on the date of grant.

	Options Granted			Option Exercise (Strike) Price				Closing Stock Price on Date of Grant				December 31, 2015
Date of Grant	Options Outstanding			Options Exercisable
April 21, 2015	893,220			$	42.00			$	41.26			817,990			—
April 22, 2014	955,000			$	56.00			$	50.53			797,500			5,000
April 16, 2013	205,000			$	54.00			$	49.25			125,000			2,500
April 17, 2012	1,235,000			$	54.00			$	49.01			1,039,500			341,250
April 19, 2011	410,000			$	35.00			$	31.78			250,300			150,300
April 20, 2010	530,000			$	30.00			$	27.13			210,350			120,350
April 21, 2009	790,000			$	27.00			$	17.61			293,100			200,600
April 15, 2008	550,000			$	27.00			$	24.35			147,750			122,750
April 17, 2007	4,380,000			$	22.50			$	20.15			849,492			849,492
Total	9,948,220											4,530,982			1,792,242

Date of Grant	Risk-free Interest Rate			Expected Life of Option in Years		Expected Dividend Yield			Expected Stock Volatility			Estimated Fair Value of Stock Option
April 21, 2015	1.3	%		5.00		2.7	%		26.84	%		$	7.35
April 22, 2014	1.8	%		5.00		2.0	%		28.55	%		$	9.57
April 16, 2013	0.7	%		5.00		1.6	%		37.42	%		$	12.66
April 17, 2012	0.9	%		5.00		1.4	%		39.25	%		$	13.69
April 19, 2011	2.1	%		5.00		1.6	%		39.33	%		$	11.20
April 20, 2010	2.6	%		5.00		1.5	%		39.10	%		$	8.14
April 21, 2009	1.9	%		5.00		1.0	%		38.80	%		$	3.64
April 15, 2008	2.7	%		5.00		1.0	%		30.93	%		$	7.75
April 17, 2007	4.6	%		4.85		1.0	%		31.59	%		$	5.63

All of the options in the tables above vest and become exercisable over a period of up to eight years. Generally, each option will terminate approximately nine years after the grant date.

The fair value of each share-based option is estimated on the date of grant using a Black-Scholes valuation method that uses the assumptions listed above. The risk-free interest rate is based on the U.S. Treasury rate over the expected life of the option at the time of grant. The expected life is the average length of time over which we expect the employee groups will exercise their options, which is based on historical experience with similar grants. The dividend yield is estimated over the expected life of the option based on our current dividend payout, historical dividends paid, and expected future cash dividends. Expected stock volatilities are based on the movement of our stock over the most recent historical period equivalent to the expected life of the option.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

A summary of the activity under our stock option plan is as follows:

	Options Outstanding			Exercise Price(1)				Remaining Life(2)
Outstanding as of January 1, 2015	4,712,330			$	38.52			4.59
Granted	893,220			$	42.00			8.41
Exercised	(813,838	)		$	23.47
Cancelled/forfeited	(260,730	)		$	45.84
Outstanding as of December 31, 2015	4,530,982			$	41.49			4.89
Exercisable as of December 31, 2015	1,792,242			$	31.00			2.15

	Options Outstanding			Exercise Price(1)				Remaining Life(2)
Outstanding as of January 1, 2014	4,356,630			$	34.06			4.66
Granted	955,000			$	56.00			8.41
Exercised	(314,300	)		$	24.49
Cancelled/forfeited	(285,000	)		$	44.39
Outstanding as of December 31, 2014	4,712,330			$	38.52			4.59
Exercisable as of December 31, 2014	1,972,330			$	27.89			2.51

(1) Weighted average exercise price.

(2) Weighted average remaining contractual life in years.

The total intrinsic value of stock options exercised during the years ended December 31, 2015, 2014, and 2013 was $14,174, $7,466, and $9,925, respectively. The intrinsic value represents the difference between the exercise price and fair value of the underlying shares at the date of exercise.

At December 31, 2015, there was $15,073 of total unrecognized stock-based compensation expense related to outstanding unvested stock options granted under the plan. This expense is expected to be recognized over a weighted average period of 4.60 years. Any future change in estimated forfeitures will impact this amount. The total grant date fair value of stock options vesting under our stock option plan during 2015, 2014, and 2013 was $5,143, $7,287, and $3,508, respectively.

Total stock-based compensation expense related to our stock option plan was $5,841, $7,039, and $5,400 for 2015, 2014, and 2013, respectively.

Earnings Per Share

The following tables present a reconciliation of the denominators used in the computation of basic and diluted earnings per share and a summary of the options to purchase shares of common stock which were excluded from the diluted earnings calculation because they were anti-dilutive:

Reconciliation	2015			2014			2013
Basic weighted average shares outstanding	291,453,107			296,490,378			296,754,160
Weighted shares assumed upon exercise of stock options	592,335			822,866			929,428
Diluted weighted average shares outstanding	292,045,442			297,313,244			297,683,588

Summary of Anti-dilutive Options Excluded	2015				2014			2013
Options to purchase shares of common stock	2,611,367				1,903,767			1,273,527
Weighted average exercise prices of options	$	51.89			54.67			54.00

Any dilutive impact summarized above related to periods when the average market price of our stock exceeded the exercise price of the potentially dilutive options then outstanding.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Note 5. Retirement Savings Plan

The Fastenal Company and Subsidiaries 401(k) and Employee Stock Ownership Plan covers all of our employees in the United States. Our employees in Canada may participate in a Registered Retirement Savings Plan. The general purpose of both of these plans is to provide additional financial security during retirement by providing employees with an incentive to make regular savings. In addition to the contributions of our employees, we make a profit sharing contribution on an annual basis based on an established formula. Our contribution expense under this profit sharing formula was approximately $13,669, $11,460, and $12,211 for 2015, 2014, and 2013, respectively.

Note 6. Income Taxes

Earnings before income taxes were derived from the following sources:

	2015				2014			2013
Domestic	$	785,916			757,896			697,062
Foreign	40,104				29,538			16,406
	$	826,020			787,434			713,468

Components of income tax expense (benefit) were as follows:

2015 :	Current				Deferred			Total
Federal	$	256,748			7,362			264,110
State	31,297				227			31,524
Foreign	13,677				348			14,025
	$	301,722			7,937			309,659

2014 :	Current				Deferred			Total
Federal	$	250,527			1,919			252,446
State	30,768				256			31,024
Foreign	10,518				(704	)		9,814
	$	291,813			1,471			293,284

2013 :	Current				Deferred			Total
Federal	$	220,588			8,547			229,135
State	29,073				527			29,600
Foreign	7,487				(1,390	)		6,097
	$	257,148			7,684			264,832

Income tax expense in the accompanying consolidated financial statements differed from the expected expense as follows:

	2015				2014			2013
Federal income tax expense at the ‘expected’ rate of 35%	$	289,107			275,602			249,714
Increase (decrease) attributed to:
State income taxes, net of federal benefit	21,613				20,549			16,683
Other, net	(1,061		)		(2,867	)		(1,565	)
Total income tax expense	$	309,659			293,284			264,832
Effective income tax rate	37.5		%		37.2	%		37.1	%

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at year end were as follows:

	2015				2014
Deferred income tax assets (liabilities):
Inventory costing and valuation methods	$	4,556			4,311
Allowance for doubtful accounts receivable	4,529				4,873
Insurance claims payable	10,930				10,404
Promotions payable	1,738				1,586
Stock-based compensation	8,270				7,837
Federal and state benefit of uncertain tax positions	1,911				1,327
Foreign net operating loss and credit carryforwards	5,155				5,768
Foreign valuation allowances	(3,406		)		(3,007	)
Other, net	1,541				592
Total deferred income tax assets	35,224				33,691
Property and equipment	(90,281		)		(80,458	)
Total deferred income tax liabilities	(90,281		)		(80,458	)
Net deferred income tax liabilities	$	(55,057	)		(46,767	)

In November 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-17, Income Taxes (Topic 740), to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and assets are required to be classified as noncurrent in a classified balance sheet. This standard will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption allowed. As of December 31, 2014, we had deferred taxes that were classified as current assets and noncurrent liabilities. During the fourth quarter of 2015, we elected to prospectively adopt this standard, thus reclassifying $23,300 of current deferred tax assets to noncurrent (netted within noncurrent liabilities) on the accompanying consolidated balance sheet. The prior reporting period was not retrospectively adjusted. The adoption of this guidance had no impact on our Consolidated Statements of Earnings and Comprehensive Income.

A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits was as follows:

	2015				2014
Balance at beginning of year:	$	3,772			3,282
Increase related to prior year tax positions	704				185
Decrease related to prior year tax positions	(43		)		(113	)
Increase related to current year tax positions	984				924
Decrease related to statute of limitation lapses	—				(506	)
Balance at end of year:	$	5,417			3,772

Included in the liability for gross unrecognized tax benefits is an immaterial amount for interest and penalties, both of which we classify as a component of income tax expense. The amount of gross unrecognized tax benefits that would favorably impact the effective tax rate, if recognized, is not material.

Fastenal files income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. With limited exceptions, we are no longer subject to income tax examinations by taxing authorities for taxable years before 2012 in the case of United States federal and foreign examinations and 2011 in the case of state and local examinations.

In general, it is our practice and intention to permanently reinvest the earnings of our foreign subsidiaries and repatriate earnings only when the tax impact is zero or very minimal. As of December 31, 2015, we have not made a provision for United States income taxes or for additional foreign withholding taxes on $140,000 of unremitted earnings. Generally, such amounts become subject to United States taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred income tax liabilities related to investments in these foreign subsidiaries.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Note 7. Geographic Information

Our revenues and long-lived assets related to the following geographic areas:

Revenues	2015				2014			2013
United States	$	3,441,141			3,308,226			2,951,673
Canada	223,270				238,590			227,756
Other foreign countries	204,776				186,691			146,677
	$	3,869,187			3,733,507			3,326,106

Long-Lived Assets	2015				2014			2013
United States	$	821,063			725,189			632,783
Canada	32,290				37,580			22,572
Other foreign countries	14,333				13,068			11,968
	$	867,686			775,837			667,323

The accounting policies of the operations in the various geographic areas are the same as those described in the summary of significant accounting policies. Long-lived assets consist of property and equipment, deposits, goodwill, and other intangibles. Revenues are attributed to countries based on the location of the store from which the sale occurred. No single customer represents more than 5% of our consolidated net sales.

Note 8. Operating Leases

We lease space under non-cancelable operating leases for several distribution centers, several manufacturing locations, and certain store locations. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Any such terms are recognized as rent expense over the term of the lease. Further, the leases do not contain contingent rent provisions. The net book value of leasehold improvements at December 31, 2015 was $2,858. We lease certain semi-tractors and pick-ups under operating leases. Future minimum annual rentals for the leased facilities and equipment, and the leased vehicles, are as follows:

	Leased Facilities and Equipment				Leased Vehicles			Total
2016	$	95,789			27,599			123,388
2017	68,833				17,713			86,546
2018	44,949				7,827			52,776
2019	24,486				1,442			25,928
2020	11,492				—			11,492
2021 and thereafter	1,579				—			1,579
	$	247,128			54,581			301,709

Rent expense under all operating leases was as follows:

	Leased Facilities and Equipment				Leased Vehicles			Total
2015	$	105,961			38,178			144,139
2014	$	103,294			35,731			139,025
2013	$	99,483			32,907			132,390

Certain operating leases for pick-up trucks contain residual value guarantee provisions which would generally become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. The aggregate residual value guarantee related to these leases was approximately $61,304. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote other than where we have established an accrual for estimated losses, which was immaterial at December 31, 2015. To the extent our fleet contains vehicles we estimate will settle at a gain, such gains on these vehicles will be recognized when we sell the vehicle.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Note 9. Debt Commitments and Contingencies

Credit Facility, Note, and Commitments

Debt obligations and undrawn letters of credit outstanding at year-end were as follows:

	2015				2014
Outstanding loans under unsecured revolving credit facility	$	350,000			90,000
Note	15,000				—
Total debt	365,000				90,000
Less: Current portion of debt	(62,050		)		(90,000	)
Long-term debt	$	302,950			—
Undrawn letters of credit under unsecured revolving credit facility - face amount	$	36,266			37,315

Unsecured Revolving Credit Facility

We have a $700,000 unsecured revolving credit facility ('Credit Facility'). The Credit Facility includes a committed letter of credit subfacility of $55,000. The commitments under the Credit Facility will expire (and any borrowings outstanding under the Credit Facility will become due and payable) on March 1, 2018. In the next twelve months, we have the ability and intent to repay a portion of the outstanding line of credit obligations using cash; therefore, we have classified this portion of the line of credit as a current liability. The Credit Facility contains certain financial and other covenants, and our right to borrow under the Credit Facility is conditioned upon, among other things, our compliance with these covenants. We are currently in compliance with these covenants.

Borrowings under the Credit Facility generally bear interest at a rate per annum equal to the London Interbank Offered Rate ('LIBOR') for interest periods of various lengths selected by us, plus 0.95%. A change in LIBOR impacts the interest rate on our borrowings, which in turn impacts interest expense incurred and cash flows. Based on the interest periods we have chosen, our weighted per annum interest rate at December 31, 2015 was approximately 1.4%. We pay a commitment fee for the unused portion of the Credit Facility. This fee is either 0.10% or 0.125% per annum based on our usage of the Credit Facility.

Note

On December 7, 2015, we signed an agreement to acquire, effective January 2, 2017, certain assets related to the collection and management of certain portions of our business and financial data from Apex Industrial Technologies, LLC ('Apex'), a provider of automated point-of-use dispensing and supply chain technologies. The agreement includes a transition arrangement which requires us to assume responsibility for certain software that is licensed by Apex assuming that hosting services are transitioned from Apex to us. The total consideration for the assets and transition arrangement is $27,000, of which $12,000 was paid in cash in December 2015 to cover costs associated with decoupling systems and programs, transition planning expenses, completing system enhancements, and engaging in training to effectively and efficiently transfer hosting activities to us. The remaining $15,000 is payable pursuant to an unsecured note and covers equipment costs and post transfer expenses related to the transition. Payment of the $15,000 is dependent upon the transfer of hosting activities to us. We also reserve the right to terminate the transition of hosting services from Apex to us and, if we decide to exercise that option, then we will not be required to make the $15,000 payment and Apex will continue to provide us with fee-based hosting services. The note bears interest at an annual rate of 0.56%. Interest on the unpaid principal balance of the note is due and payable on the last day of each calendar quarter, commencing on December 31, 2015. The $12,000 payment is included in our Consolidated Statements of Cash Flows for 2015, as net cash used in investing activities in 'Other', and the $15,000 note represents a non-cash investing and financing activity.

Annual maturities of the note are as follows:

	Total
2016	$	5,000
2017	10,000
	$	15,000

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Legal Contingencies

We are involved in certain legal actions. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, that could require significant expenditures or result in lost revenues. We record a liability for these legal actions 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 most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. As of December 31, 2015, there were no litigation matters that we consider to be probable or reasonably possible to have a material adverse outcome.

Note 10. Sales by Product Line

The percentages of our net sales by product line were as follows:

Type	Introduced		2015		2014		2013
Fasteners(1)	1967		38.3%		40.2%		42.1%
Tools	1993		9.5%		9.3%		9.2%
Cutting tools	1996		5.6%		5.5%		5.4%
Hydraulics & pneumatics	1996		7.2%		7.2%		7.3%
Material handling	1996		6.5%		6.1%		5.7%
Janitorial supplies	1996		7.5%		7.3%		7.0%
Electrical supplies	1997		4.7%		4.7%		4.6%
Welding supplies(2)	1997		4.7%		4.7%		4.5%
Safety supplies(3)	1999		13.9%		12.8%		11.2%
Metals	2001		0.5%		0.4%		0.5%
Direct ship(4)	2004		0.4%		1.0%		1.5%
Office supplies	2010		0.1%		0.1%		0.1%
Other			1.1%		0.7%		0.9%
			100.0%		100.0%		100.0%

(1) Fastener product line represents fasteners and miscellaneous supplies.

(2) We do not sell welding gases.

(3) The safety supplies product line has expanded, as a percentage of sales, in the last several years due to our industrial vending program.

(4) Direct ship represents a cross section of products from the remaining product lines. The items included here represent certain items with historically low margins which are shipped directly from our distribution channel to our customers, bypassing our store network.

Note 11. Subsequent Events

We evaluated all subsequent event activity and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the Notes to Consolidated Financial Statements, with the exception of the dividend declaration and stock purchases disclosed in Note 4.

Note 12. New Accounting Pronouncements

In July 2015, the FASB issued Accounting Standards Update (ASU) 2015-11, Simplifying the Measurement of Inventory which changes the measurement principle for inventory for entities using first-in, first-out (FIFO) or average cost from the lower of cost or market to lower of cost and net realizable value. This standard defines net realizable value as estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. This standard should be applied prospectively. We are evaluating the impact of the future adoption of this standard, but we do not expect the adoption to have a material effect on our consolidated financial statements.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (ASU 2015-14), which defers the effective date of ASU 2014-09 for all entities by one year. This update is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU 2014-09 was to become effective for us beginning January 2017. ASU 2015-14 defers our effective date until January 2018. We are evaluating the impact this ASU will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), to simplify the presentation of deferred income taxes. During the fourth quarter of 2015, we elected to prospectively adopt this standard. Additional information regarding our adoption of this standard is contained in Note 6 of the Notes to Consolidated Financial Statements.

Note 13. Selected Quarterly Financial Data (Unaudited)

(Amounts in thousands except per share information)

2015 :	Net Sales				Gross Profit			Pre-tax Earnings			Net Earnings			Basic Net Earnings per Share			Diluted Net Earnings per Share
First quarter	$	953,317			484,050			203,512			127,606			0.43			0.43
Second quarter	997,827				502,087			225,099			140,357			0.48			0.48
Third quarter	995,250				502,225			219,204			136,494			0.47			0.47
Fourth quarter	922,793				460,572			178,205			111,904			0.39			0.39
Total	$	3,869,187			1,948,934			826,020			516,361			1.77			1.77

2014 :	Net Sales				Gross Profit			Pre-tax Earnings			Net Earnings			Basic Net Earnings per Share			Diluted Net Earnings per Share
First quarter	$	876,501			448,478			178,845			111,931			0.38			0.38
Second quarter	949,938				482,667			206,782			130,514			0.44			0.44
Third quarter	980,814				498,693			212,988			133,314			0.45			0.45
Fourth quarter	926,254				467,564			188,819			118,391			0.40			0.40
Total	$	3,733,507			1,897,402			787,434			494,150			1.67			1.66

End of Notes to Consolidated Financial Statements