Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and board of directors of

Fastenal Company:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Fastenal Company and subsidiaries (the 'Company') as of December 31, 2018 and 2017, 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, 2018, and the related notes and financial statement schedule listed in the table of contents at Item 15 (collectively, the 'consolidated financial statements'). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, 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 the Company's consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ('PCAOB') and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.

Definition and Limitations of Internal Control Over Financial Reporting

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.

/s/ KPMG LLP

We have served as the Company’s auditor since 1987.

Minneapolis, Minnesota

February 6, 2019

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in millions except share information)

	December 31
	2018				2017
Assets
Current assets:
Cash and cash equivalents	$	167.2			116.9
Trade accounts receivable, net of allowance for doubtful accounts of $12.8 and $11.9, respectively	714.3				607.8
Inventories	1,278.7				1,092.9
Prepaid income taxes	9.0				—
Other current assets	147.0				118.1
Total current assets	2,316.2				1,935.7
Property and equipment, net	924.8				893.6
Other assets	80.5				81.2
Total assets	$	3,321.5			2,910.5
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of debt	$	3.0			3.0
Accounts payable	193.6				147.5
Accrued expenses	240.8				194.0
Income taxes payable	—				6.5
Total current liabilities	437.4				351.0
Long-term debt	497.0				412.0
Deferred income taxes	84.4				50.6
Commitments and contingencies (Notes 5, 8, 9, and 10)
Stockholders’ equity:
Preferred stock: $0.01 par value, 5,000,000 shares authorized, no shares issued or outstanding	—				—
Common stock: $0.01 par value, 400,000,000 shares authorized, 285,901,919 and 287,591,536 shares issued and outstanding, respectively	2.9				2.9
Additional paid-in capital	3.0				8.5
Retained earnings	2,341.6				2,110.6
Accumulated other comprehensive loss	(44.8		)		(25.1	)
Total stockholders’ equity	2,302.7				2,096.9
Total liabilities and stockholders’ equity	$	3,321.5			2,910.5

See accompanying Notes to Consolidated Financial Statements.

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Earnings

(Amounts in millions except earnings per share)

For the year ended December 31

	2018				2017			2016
Net sales	$	4,965.1			4,390.5			3,962.0
Cost of sales	2,566.2				2,226.9			1,997.2
Gross profit	2,398.9				2,163.6			1,964.8
Operating and administrative expenses	1,400.2				1,282.8			1,169.5
Gain on sale of property and equipment	(0.5		)		(1.0	)		(0.5	)
Operating income	999.2				881.8			795.8
Interest income	0.4				0.4			0.4
Interest expense	(12.6		)		(9.1	)		(6.5	)
Earnings before income taxes	987.0				873.1			789.7
Income tax expense	235.1				294.5			290.3
Net earnings	$	751.9			578.6			499.4
Basic net earnings per share	$	2.62			2.01			1.73
Diluted net earnings per share	$	2.62			2.01			1.73
Basic weighted average shares outstanding	287.0				288.2			288.9
Diluted weighted average shares outstanding	287.2				288.3			289.2

See accompanying Notes to Consolidated Financial Statements.

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Amounts in millions)

For the year ended December 31

	2018				2017			2016
Net earnings	$	751.9			578.6			499.4
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (net of tax of $0.0 in 2018, 2017, and 2016)	(19.7		)		22.2			(0.9	)
Comprehensive income	$	732.2			600.8			498.5

See accompanying Notes to Consolidated Financial Statements.

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(Amounts in millions)

	Common Stock
	Shares			Amount				Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
Balance as of December 31, 2015	289.6			$	2.9			2.0			1,842.9			(46.4	)		1,801.4
Dividends paid in cash	—			—				—			(346.6	)		—			(346.6	)
Purchases of common stock	(1.6	)		—				(3.9	)		(55.6	)		—			(59.5	)
Stock options exercised	1.2			—				29.3			—			—			29.3
Stock-based compensation	—			—				4.1			—			—			4.1
Excess tax benefits from stock-based compensation	—			—				5.9			—			—			5.9
Net earnings	—			—				—			499.4			—			499.4
Other comprehensive income (loss)	—			—				—			—			(0.9	)		(0.9	)
Balance as of December 31, 2016	289.2			$	2.9			37.4			1,940.1			(47.3	)		1,933.1
Dividends paid in cash	—			—				—			(369.1	)		—			(369.1	)
Purchases of common stock	(1.9	)		—				(43.6	)		(39.0	)		—			(82.6	)
Stock options exercised	0.3			—				9.5			—			—			9.5
Stock-based compensation	—			—				5.2			—			—			5.2
Net earnings	—			—				—			578.6			—			578.6
Other comprehensive income (loss)	—			—				—			—			22.2			22.2
Balance as of December 31, 2017	287.6			$	2.9			8.5			2,110.6			(25.1	)		2,096.9
Dividends paid in cash	—			—				—			(441.9	)		—			(441.9	)
Purchases of common stock	(2.0	)		—				(24.0	)		(79.0	)		—			(103.0	)
Stock options exercised	0.3			—				13.4			—			—			13.4
Stock-based compensation	—			—				5.1			—			—			5.1
Net earnings	—			—				—			751.9			—			751.9
Other comprehensive income (loss)	—			—				—			—			(19.7	)		(19.7	)
Balance as of December 31, 2018	285.9			$	2.9			3.0			2,341.6			(44.8	)		2,302.7

See accompanying Notes to Consolidated Financial Statements.

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Amounts in millions)

For the year ended December 31

	2018				2017			2016
Cash flows from operating activities:
Net earnings	$	751.9			578.6			499.4
Adjustments to reconcile net earnings to net cash provided by operating activities, net of acquisitions:
Depreciation of property and equipment	134.1				123.6			103.5
Gain on sale of property and equipment	(0.5		)		(1.0	)		(0.5	)
Bad debt expense	8.1				8.2			8.6
Deferred income taxes	33.8				(30.0	)		25.6
Stock-based compensation	5.1				5.2			4.1
Amortization of intangible assets	4.1				3.8			0.5
Changes in operating assets and liabilities, net of acquisitions:
Trade accounts receivable	(120.3		)		(103.7	)		(40.5	)
Inventories	(193.3		)		(76.3	)		(80.9	)
Other current assets	(28.9		)		(15.6	)		29.1
Accounts payable	46.1				36.3			(17.2	)
Accrued expenses	46.8				37.6			(28.6	)
Income taxes	(15.5		)		19.4			15.5
Other	2.7				(0.9	)		1.3
Net cash provided by operating activities	674.2				585.2			519.9
Cash flows from investing activities:
Purchases of property and equipment	(176.3		)		(119.9	)		(189.5	)
Proceeds from sale of property and equipment	9.5				7.4			6.5
Cash paid for acquisitions	(3.7		)		(58.7	)		—
Other	(3.4		)		(8.1	)		(5.1	)
Net cash used in investing activities	(173.9		)		(179.3	)		(188.1	)
Cash flows from financing activities:
Proceeds from debt obligations	980.0				1,015.0			950.0
Payments against debt obligations	(895.0		)		(980.0	)		(920.0	)
Proceeds from exercise of stock options	13.4				9.5			29.3
Purchases of common stock	(103.0		)		(82.6	)		(59.5	)
Payments of dividends	(441.9		)		(369.1	)		(346.6	)
Net cash used in financing activities	(446.5		)		(407.2	)		(346.8	)
Effect of exchange rate changes on cash and cash equivalents	(3.5		)		5.5			(1.3	)
Net increase (decrease) in cash and cash equivalents	50.3				4.2			(16.3	)
Cash and cash equivalents at beginning of year	116.9				112.7			129.0
Cash and cash equivalents at end of year	$	167.2			116.9			112.7
Supplemental disclosure of cash flow information:
Cash paid for interest	$	12.6			8.7			6.2
Net cash paid for income taxes	$	215.3			304.1			248.3

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 branch-based business (with an increasing number of Onsite locations). Collectively we refer to our branches and Onsite locations as in-market locations. We have approximately 3,100 in-market locations located 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

Net sales include products and shipping and handling charges, net of estimates for product returns and any related sales

incentives. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All

revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring

the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control

of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up

by the customer. We estimate product returns based on historical return rates. Using probability assessments, we estimate sales

incentives expected to be paid over the term of the contract. The majority of our contracts have a single performance obligation

and are short term in nature. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and

remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.

Accounts Receivable

Credit is extended based upon an evaluation of the customer's financial condition. 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.

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 applicable period. The translation adjustments are deferred as a separate component of stockholders' equity captioned accumulated other comprehensive income (loss). Gains or losses resulting from transactions denominated in foreign currencies are included in cost of sales or 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.

Inventories

Inventories, consisting of finished goods merchandise held for resale, are stated at the lower of cost (first in, first out method) or net realizable value. We establish a reserve for excess, slow-moving, and obsolete inventory that is equal to the difference between the cost and estimated net realizable value for that inventory. These reserves are based on a review and comparison of the current inventory levels to projected and historical sales of inventory.

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

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

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, branches, 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, and other definite-lived 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 identifiable 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, revenues and expenses, and the disclosure of contingent liabilities. Actual results could differ from those estimates.

Insurance Reserves

We are self-insured for certain losses relating to workers' compensation, automobile, health, and general liability costs. Specific stop-loss coverage is provided for catastrophic claims in order to limit exposure to significant claims. Self-insurance liabilities are based on our estimate of reported claims and claims incurred but not yet 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.

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.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

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 for our North American operations 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. Considering the insignificance of our operations outside of North America, we report as a single business segment.

Recently Adopted Accounting Pronouncements

Effective January 1, 2018, we adopted the Financial Accounting Standards Board ('FASB') Accounting Standards Update

('ASU') 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2015-14, Revenue from Contracts with

Customers (Topic 606): Deferral of Effective Date, which deferred the effective date of ASU 2014-09 by one year. ASU

2014-09 supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and is based on the principle that

revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to

which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the

nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments

and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The adoption of ASU

2014-09, using the modified retrospective approach, had no significant impact on our results of operations, cash flows, or

financial position. Revenue continues to be recognized at a point in time for our product sales when products are delivered to or

picked up by the customer and revenue for shipping and handling charges continues to be recognized when products are

delivered to or picked up by the customer. We continue to reduce revenue for estimates of sales incentives based on probability

estimates and for product returns based on historical return rates. Additional information and disclosures required by this new

standard are contained in Note 2, 'Revenue'.

In March 2018, we adopted FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC

Staff Accounting Bulletin No. 118, which updates the income tax accounting in U.S. GAAP to reflect the Securities and

Exchange Commission ('SEC') interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (the 'Tax

Act') was signed into law. Additional information regarding the adoption of this standard is contained in Note 7, 'Income Taxes'.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, with early adoption permitted. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition. Based on the effective date, this guidance will apply and we will adopt this ASU beginning on January 1, 2019 and plan to elect the transition option provided under ASU 2018-11. We expect this standard will have a material effect on our Consolidated Balance Sheets with the recognition of new right of use assets and lease liabilities for all operating leases, except pick-up truck leases where we expect to elect the short-term lease recognition exemption, as these leases typically have a non-cancelable lease term of approximately one year. Upon adoption, we estimate both assets and liabilities on our Consolidated Balance Sheets will increase by approximately $250.0. Changes in our lease population or changes in incremental borrowing rates may alter this estimate. We will expand our consolidated financial statement disclosures upon adoption of this standard.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Note 2. Revenue

Disaggregation of Revenue

The accounting policies of the operations in the various geographic areas are the same as those described in the summary of significant accounting policies. Revenues are attributed to countries based on the location of the branch from which the sale occurred. In each of the years presented in the tables below, no single customer represented 5% or more of our consolidated net sales.

Our revenues related to the following geographic areas were as follows for the periods ended December 31:

	Twelve-month period
	2018				2017			2016
United States	$	4,285.5			3,842.9			3,493.5
All foreign countries	679.6				547.6			468.5
Total revenues	$	4,965.1			4,390.5			3,962.0

The percentages of our sales by end market were as follows for the periods ended December 31:

	Twelve-month period
	2018			2017			2016
Manufacturing	66.7	%		66.5	%		65.9	%
Non-residential construction	13.1	%		13.0	%		13.6	%
Other	20.2	%		20.5	%		20.5	%
	100.0	%		100.0	%		100.0	%

The percentages of our sales by product line were as follows for the periods ended December 31(1):

			Twelve-month Period
Type	Introduced		2018			2017			2016
Fasteners(2)	1967		34.9	%		35.6	%		36.6	%
Tools	1993		10.0	%		10.1	%		9.9	%
Cutting tools	1996		5.7	%		5.8	%		5.7	%
Hydraulics & pneumatics	1996		6.8	%		6.8	%		6.9	%
Material handling	1996		5.8	%		5.9	%		6.0	%
Janitorial supplies	1996		7.6	%		7.3	%		7.3	%
Electrical supplies	1997		4.7	%		4.9	%		4.8	%
Welding supplies	1997		4.1	%		4.2	%		4.2	%
Safety supplies	1999		17.2	%		16.3	%		16.0	%
Other			3.2	%		3.1	%		2.6	%
			100.0	%		100.0	%		100.0	%

(1) In 2018, we reclassified certain product category designations and have conformed the prior period percentages to the current year presentation.

(2) The fastener product line represents fasteners and miscellaneous supplies.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Note 3. Long-Lived Assets

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 net property and equipment, deposits, goodwill, and other net intangibles.

Property and equipment at year end consisted of the following:

	Depreciable Life in Years			2018				2017
Land	—			$	36.3			38.2
Buildings and improvements	15 to 40			323.1				308.2
Automated distribution and warehouse equipment	5 to 30			229.1				220.0
Shelving, industrial vending, and equipment	3 to 10			927.6				812.9
Transportation equipment	3 to 5			77.9				76.3
Construction in progress	—			152.2				149.3
				1,746.2				1,604.9
Less accumulated depreciation				(821.4		)		(711.3	)
Property and equipment, net				$	924.8			893.6

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

	2018				2017			2016
United States	$	947.7			919.5			899.1
All foreign countries	57.6				55.3			49.0
Total long-lived assets	$	1,005.3			974.8			948.1

Note 4. Accrued Expenses

Accrued expenses at year end consisted of the following:

	2018				2017
Employee payroll and related taxes	$	27.6			26.0
Employee bonuses and commissions	22.8				19.8
Profit sharing contribution	13.0				10.6
Insurance reserves	37.6				39.0
Indirect taxes	63.6				51.1
Customer promotions and marketing	50.9				36.6
Other	25.3				10.9
Accrued expenses	$	240.8			194.0

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Note 5. Stockholders' Equity

Dividends

On January 16, 2019, our board of directors declared a quarterly dividend of $0.43 per share of common stock to be paid in cash on February 27, 2019 to shareholders of record at the close of business on January 31, 2019. We paid aggregate annual dividends per share of $1.54, $1.28, and $1.20 in 2018, 2017, and 2016, respectively.

Stock Options

Effective January 2, 2019, the compensation committee of our board of directors granted to our employees options to purchase a total of 643,957 shares of our common stock at an exercise strike price of $52.00 per share. The closing stock price on the effective date of the grant was $51.41 per share. On the same date, certain of our non-employee directors elected to forgo all or a portion of the 2019 annual cash retainer in exchange for options to acquire a total of 14,505 shares of our common stock at an exercise price of $52.00 per share.

The following tables summarize the details of options granted under our stock option plans that were still outstanding as of December 31, 2018, and the assumptions used to value those grants. All such grants 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, 2018
Date of Grant	Options Outstanding			Options Exercisable
January 2, 2018	543,968			$	55.00			$	54.54			524,256			21,185
January 3, 2017	764,789			$	47.00			$	46.95			679,700			—
April 19, 2016	845,440			$	46.00			$	45.74			683,889			194,672
April 21, 2015	893,220			$	42.00			$	41.26			622,301			185,528
April 22, 2014	955,000			$	56.00			$	50.53			511,250			332,250
April 16, 2013	205,000			$	54.00			$	49.25			88,123			54,380
April 17, 2012	1,235,000			$	54.00			$	49.01			812,063			700,813
April 19, 2011	410,000			$	35.00			$	31.78			49,650			37,150
April 20, 2010	530,000			$	30.00			$	27.13			28,400			28,400
Total	6,382,417											3,999,632			1,554,378

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
January 2, 2018	2.2	%		5.00		2.3	%		23.45	%		$	10.03
January 3, 2017	1.9	%		5.00		2.6	%		24.49	%		$	8.40
April 19, 2016	1.3	%		5.00		2.6	%		26.34	%		$	8.18
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

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

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

volatilities are based on the movement of our stock price over the most recent historical period equivalent to the expected life of the option.

A summary of activities under our stock option plans consisted of the following:

	Options Outstanding			Exercise Price(1)				Remaining Life(2)
Outstanding as of January 1, 2018	3,948,908			$	48.28			5.89
Granted	543,968			$	55.00			9.00
Exercised	(310,383	)		$	43.31
Cancelled/forfeited	(182,861	)		$	48.86
Outstanding as of December 31, 2018	3,999,632			$	49.53			5.61
Exercisable as of December 31, 2018	1,554,378			$	51.06			3.69

	Options Outstanding			Exercise Price(1)				Remaining Life(2)
Outstanding as of January 1, 2017	3,757,947			$	46.81			5.85
Granted	764,789			$	47.00			9.00
Exercised	(329,612	)		$	28.59
Cancelled/forfeited	(244,216	)		$	48.22
Outstanding as of December 31, 2017	3,948,908			$	48.28			5.89
Exercisable as of December 31, 2017	1,280,499			$	50.07			3.78

(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, 2018, 2017, and 2016 was $4.2, $6.9, and $23.2, 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, 2018, there was $13.7 of total unrecognized stock-based compensation expense related to outstanding unvested stock options granted under the employee stock option plan. This expense is expected to be recognized over a weighted average period of 3.89 years. Any future change in estimated forfeitures will impact this amount. The total grant date fair value of stock options vested under our employee stock option plan during 2018, 2017, and 2016 was $5.3, $4.2, and $7.1, respectively.

Total stock-based compensation expense related to our employee stock option plan was $5.1, $5.2, and $4.1 for 2018, 2017, and 2016, 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	2018			2017			2016
Basic weighted average shares outstanding	286,966,917			288,208,435			288,949,525
Weighted shares assumed upon exercise of stock options	195,847			134,298			207,998
Diluted weighted average shares outstanding	287,162,764			288,342,733			289,157,523

Summary of Anti-dilutive Options Excluded	2018				2017			2016
Options to purchase shares of common stock	1,579,757				3,524,401			3,095,343
Weighted average exercise prices of options	$	55.02			49.85			50.09

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

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Note 6. 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 contributions. In addition to the participation of our employees, we make annual profit sharing contributions based on an established formula. The expense recorded under this profit sharing formula was approximately $13.0, $10.6, and $8.7 for 2018, 2017, and 2016, respectively.

Note 7. Income Taxes

Earnings before income taxes were derived from the following sources:

	2018				2017			2016
Domestic	$	905.0			809.4			739.4
Foreign	82.0				63.7			50.3
Earnings before income taxes	$	987.0			873.1			789.7

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

2018:	Current				Deferred			Total
Federal	$	143.8			27.4			171.2
State	38.8				0.2			39.0
Foreign	24.1				0.8			24.9
Income tax expense	$	206.7			28.4			235.1

2017:	Current				Deferred			Total
Federal	$	270.6			(33.1	)		237.5
State	33.2				3.3			36.5
Foreign	20.5				—			20.5
Income tax expense	$	324.3			(29.8	)		294.5

2016:	Current				Deferred			Total
Federal	$	223.9			23.2			247.1
State	28.2				1.2			29.4
Foreign	12.6				1.2			13.8
Income tax expense	$	264.7			25.6			290.3

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

	2018				2017			2016
U.S. federal statutory income tax rate	21.0		%		35.0	%		35.0	%
U.S. federal income tax expense at statutory rate	$	207.3			305.6			276.4
Increase (decrease) attributed to:
State income taxes, net of federal benefit	30.2				21.5			20.0
Transition tax	1.2				6.5			—
Remeasurement of deferred taxes for Tax Act	(11.5		)		(30.8	)		—
Other, net	7.9				(8.3	)		(6.1	)
Total income tax expense	$	235.1			294.5			290.3
Effective income tax rate	23.8		%		33.7	%		36.8	%

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 consisted of the following:

	2018				2017
Deferred income tax assets (liabilities):
Inventory costing and valuation methods	$	4.2			3.6
Allowance for doubtful accounts	3.2				3.0
Insurance reserves	8.1				8.4
Customer promotions	1.9				1.3
Stock-based compensation	5.6				5.2
Federal and state benefit of uncertain tax positions	0.8				0.9
Foreign net operating loss and credit carryforwards	3.2				4.2
Foreign valuation allowances	(2.7		)		(2.8	)
Other, net	1.3				0.8
Total deferred income tax assets	25.6				24.6
Property and equipment	(104.7		)		(75.2	)
Total deferred income tax liabilities	(104.7		)		(75.2	)
Deferred income tax liabilities	$	(79.1	)		(50.6	)

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

	2018				2017
Balance at beginning of year:	$	4.4			5.4
Increase related to prior year tax positions	1.8				0.4
Decrease related to prior year tax positions	(0.6		)		(0.5	)
Increase related to current year tax positions	0.7				0.7
Decrease related to statute of limitation lapses	(0.9		)		(1.1	)
Settlements	(0.1		)		(0.5	)
Balance at end of year:	$	5.3			4.4

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. We do not anticipate significant changes in total unrecognized tax benefits during the next twelve months. The 2018 liability is included in deferred income taxes and the 2017 liability is included in income taxes payable on the Consolidated Balance Sheets.

We file 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 2016 in the case of United States federal examinations, and 2014 in the case of foreign, state, and local examinations.

On December 22, 2017, the Tax Act was signed into law. The Tax Act made broad and complex changes to the U.S. tax code which include: a lowering of the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, accelerated expensing of qualified capital investments for a specific period, and a transition from a worldwide to a territorial tax system which requires companies to pay a one-time transition tax on certain unrepatriated earnings from foreign subsidiaries.

ASC 740 requires a company to record the effects of a tax law change in the period of enactment which, for us, was fiscal 2017. ASU 2018-05 provides guidance on the application of the Tax Act which includes allowing a company to record a provisional amount during the measurement period for the impacts when the necessary information is not available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

We recorded income tax expense of $235.1 in 2018, or 23.8% of earnings before income taxes. The effective income tax rate was significantly impacted by the following two items: (1) The lower corporate tax rate provided by the Tax Act resulted in a lower tax rate beginning in the first quarter of 2018. The effective income tax rate includes the immaterial impact of the U.S.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

tax rate on certain offshore earnings referred to as GILTI, a new deduction for FDII, and the new alternative U.S. tax on certain BEAT payments from a U.S. company to any foreign related party. (2) Discrete income tax items to adjust our transition tax liability, reflect the impacts of accelerating depreciation for certain physical assets, and remeasure the impact of the U.S. tax rate on certain inter-company transactions. These discrete items resulted in approximately $7.1 of income tax benefit during 2018. The accounting for the income tax effects of the Tax Act is complete as of December 31, 2018.

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 and that position has not changed subsequent to the one-time transition tax under the Tax Act. Accordingly, no deferred taxes have been provided for withholding taxes or other taxes that would result upon repatriation of our approximately $248.0 of undistributed earnings from foreign subsidiaries to the U.S. as those earnings continue to be permanently reinvested.

Note 8. Operating Leases

We lease space under non-cancelable operating leases for several distribution centers, several manufacturing locations, and certain branch 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, 2018 was $2.3. We lease certain semi-tractors and pick-ups under operating leases. Our pick-up leases typically have a non-cancelable lease term of one year, with renewal options for up to 72 months. Our average lease term for pick-ups is typically 39 months to 45 months. Future minimum lease payments for all operating leases are as follows:

	Leased Facilities and Equipment				Leased Vehicles			Total
2019	$	84.1			40.0			124.1
2020	69.1				25.5			94.6
2021	42.8				10.9			53.7
2022	21.8				1.9			23.7
2023	9.7				—			9.7
2024 and thereafter	3.7				—			3.7
Total minimum lease payments	$	231.2			78.3			309.5

Rent expense under all operating leases was as follows:

	Leased Facilities and Equipment				Leased Vehicles			Total
2018	$	110.7			47.5			158.2
2017	$	109.5			45.8			155.3
2016	$	110.1			42.7			152.8

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 $80.8. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote. 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

Credit Facility, Notes Payable, and Commitments

Debt obligations and letters of credit outstanding at year end consisted of the following:

	2018				2017
Outstanding loans under unsecured revolving credit facility	$	365.0			280.0
2.00% Senior unsecured promissory note payable	40.0				40.0
2.45% Senior unsecured promissory note payable	35.0				35.0
3.22% Senior unsecured promissory note payable	60.0				60.0
Total debt	500.0				415.0
Less: Current portion of debt	(3.0		)		(3.0	)
Long-term debt	$	497.0			412.0
Outstanding letters of credit under unsecured revolving credit facility - contingent obligation	$	36.3			36.3

Unsecured Revolving Credit Facility

We have a $700.0 committed unsecured revolving credit facility ('Credit Facility'). The Credit Facility includes a committed letter of credit subfacility of $55.0. The commitments under the Credit Facility will expire (and any borrowings outstanding under the Credit Facility will become due and payable) on November 30, 2023. In the next twelve months, we have the ability and intent to repay a portion of the outstanding loans using cash; therefore, we have classified this portion 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%. Based on the interest periods we have chosen, our weighted per annum interest rate at December 31, 2018 was approximately 3.5%. 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.

Senior Unsecured Promissory Notes Payable

We have issued senior unsecured promissory notes under our master note agreement (the 'Master Note Agreement') in the aggregate principal amount of $135.0. Our aggregate borrowing capacity under the Master Note Agreement is $600.0; however, none of the institutional investors party to that agreement are committed to purchase notes thereunder.

The notes currently issued under our Master Note Agreement consist of three series. The first is in an aggregate principal amount of $40.0, bears interest at a fixed rate of 2.00% per annum, and is due and payable on July 20, 2021. The second is in an aggregate principal amount of $35.0, bears interest at a fixed rate of 2.45% per annum, and is due and payable on July 20, 2022. The third is in an aggregate principal amount of $60.0, bears interest at a fixed rate of 3.22% per annum, and is due and payable on March 1, 2024. There is no amortization of these notes prior to their maturity date and interest is payable quarterly.

Note 10. 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, 2018, there were no litigation matters that we consider to be probable or reasonably possible to have a material adverse outcome.

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 option activities disclosed in Note 5.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Note 12. Selected Quarterly Financial Data (Unaudited)

(Amounts in millions except per share information)

2018:	Net Sales				Gross Profit			Pre-tax Earnings			Net Earnings		(1)	Basic Net Earnings per Share		(1), (2)	Diluted Net Earnings per Share		(1), (2)
First quarter	$	1,185.8			577.6			231.9			174.3			0.61			0.61
Second quarter	1,267.9				617.7			265.9			211.2			0.74			0.74
Third quarter	1,279.8				615.8			259.4			197.6			0.69			0.69
Fourth quarter	1,231.6				587.8			229.8			168.8			0.59			0.59
Total	$	4,965.1			2,398.9			987.0			751.9			2.62			2.62

2017:	Net Sales				Gross Profit			Pre-tax Earnings			Net Earnings			Basic Net Earnings per Share		(2)	Diluted Net Earnings per Share		(2)
First quarter	$	1,047.7			518.0			210.9			134.2			0.46			0.46
Second quarter	1,121.5				558.5			235.4			148.9			0.52			0.52
Third quarter	1,132.8				555.9			226.0			143.1			0.50			0.50
Fourth quarter	1,088.5				531.2			200.8			152.4		(3)	0.53		(3)	0.53		(3)
Total	$	4,390.5			2,163.6			873.1			578.6		(3)	2.01		(3)	2.01		(3)

(1) Absent the impact of the Tax Act, our net earnings for the first, second, third, and fourth quarters would have been $147.0, $168.7, $164.3, and $145.2, respectively, and $625.2 for the full year. Our basic and diluted net earnings per share would have each been $0.51, $0.59, $0.57, and $0.51, respectively, and $2.18 for the full year.

(2) Amounts may not foot due to rounding difference.

(3) Absent the impact of the Tax Act, our net earnings for the fourth quarter of 2017 would have been approximately $128.1 and $554.2 for the full year. Our basic and diluted net earnings per share would have each been $0.45 for the fourth quarter and $1.92 for the full year.

End of Notes to Consolidated Financial Statements