Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders 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, 2019 and 2018, 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, 2019 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, 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, 2019 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for operating leases as of January 1, 2019 due to the adoption of ASU 2016-02, Leases (Topic 842).

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 Annual 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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to an account or disclosure that is material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Evaluation of the sufficiency of audit evidence over inventory

As disclosed in the consolidated balance sheets, the Company holds $1,366.4 million of inventory, the majority of which was held at 3,228 in-market locations, as of December 31, 2019. The Company’s processes to track and determine consolidated inventory relies on a perpetual inventory system which involves the interaction of multiple information technology (IT) systems.

We identified the evaluation of the sufficiency of audit evidence obtained related to the quantities of inventory as a critical audit matter. Evaluating the sufficiency of audit evidence over quantities of inventory required challenging auditor judgment to assess the number of in-market locations visited, and included the involvement of IT professionals with specialized skills and knowledge due to the interaction of multiple IT systems to track physical inventory quantities by locations.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s perpetual inventory process. The inventory controls included the testing of IT application controls, as well as controls related to access to program and data, program change, program development, and computer operations. It also included controls over the physical inventory cycle counts. We involved IT professionals with specialized skills and knowledge, who assisted in testing IT controls inclusive of the interface of multiple IT systems which support the Company’s perpetual inventory system. We evaluated the following information regarding the Company’s inventory quantities:

•	Historical inventory locations visited;

•	Inventory dollars by location; and

•	Inventory cycle count results of the Company, including the results of monitoring and compliance with cycle count program by in-market location.

On a sample basis, we tested the inventory by counting inventory quantities through location visits during the year to evaluate the Company’s perpetual inventory records. In addition, we evaluated the overall sufficiency of audit evidence obtained over the quantities of inventory.

/s/ KPMG LLP

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

Minneapolis, Minnesota

February 6, 2020

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in millions except share information)

	December 31
	2019				2018
Assets
Current assets:
Cash and cash equivalents	$	174.9			167.2
Trade accounts receivable, net of allowance for doubtful accounts of $10.9 and $12.8, respectively	741.8				714.3
Inventories	1,366.4				1,278.7
Prepaid income taxes	16.7				9.0
Other current assets	157.4				147.0
Total current assets	2,457.2				2,316.2
Property and equipment, net	1,023.2				924.8
Operating lease right-of-use assets	243.2				—
Other assets	76.3				80.5
Total assets	$	3,799.9			3,321.5
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of debt	$	3.0			3.0
Accounts payable	192.8				193.6
Accrued expenses	251.5				240.8
Current portion of operating lease liabilities	97.4				—
Total current liabilities	544.7				437.4
Long-term debt	342.0				497.0
Operating lease liabilities	148.2				—
Deferred income taxes	99.4				84.4
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, 800,000,000 shares authorized, 574,128,911 and 571,803,838 shares issued and outstanding, respectively	2.9				2.9
Additional paid-in capital	67.2				3.0
Retained earnings	2,633.9				2,341.6
Accumulated other comprehensive loss	(38.4		)		(44.8	)
Total stockholders’ equity	2,665.6				2,302.7
Total liabilities and stockholders’ equity	$	3,799.9			3,321.5

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

	2019				2018			2017
Net sales	$	5,333.7			4,965.1			4,390.5
Cost of sales	2,818.3				2,566.2			2,226.9
Gross profit	2,515.4				2,398.9			2,163.6
Operating and administrative expenses	1,459.4				1,400.2			1,282.8
Gain on sale of property and equipment	(1.2		)		(0.5	)		(1.0	)
Operating income	1,057.2				999.2			881.8
Interest income	0.4				0.4			0.4
Interest expense	(13.9		)		(12.6	)		(9.1	)
Earnings before income taxes	1,043.7				987.0			873.1
Income tax expense	252.8				235.1			294.5
Net earnings	$	790.9			751.9			578.6
Basic net earnings per share	$	1.38			1.31			1.00
Diluted net earnings per share	$	1.38			1.31			1.00
Basic weighted average shares outstanding	573.2				573.9			576.4
Diluted weighted average shares outstanding	574.4				574.3			576.7

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

	2019				2018			2017
Net earnings	$	790.9			751.9			578.6
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (net of tax of $0.0 in 2019, 2018, and 2017)	6.4				(19.7	)		22.2
Comprehensive income	$	797.3			732.2			600.8

See accompanying Notes to Consolidated Financial Statements.

FASTENAL COMPANY AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(Amounts in millions)

	2019				2018			2017
Common stock
Balance at beginning of year	$	2.9			2.9			2.9
Balance at end of year	2.9				2.9			2.9
Additional paid-in capital
Balance at beginning of year	3.0				8.5			37.4
Stock options exercised	58.5				13.4			9.5
Purchases of common stock	—				(24.0	)		(43.6	)
Stock-based compensation	5.7				5.1			5.2
Balance at end of year	67.2				3.0			8.5
Retained earnings
Balance at beginning of year	2,341.6				2,110.6			1,940.1
Net earnings	790.9				751.9			578.6
Dividends paid in cash	(498.6		)		(441.9	)		(369.1	)
Purchases of common stock	—				(79.0	)		(39.0	)
Balance at end of year	2,633.9				2,341.6			2,110.6
Accumulated other comprehensive income (loss)
Balance at beginning of year	(44.8		)		(25.1	)		(47.3	)
Other comprehensive income (loss)	6.4				(19.7	)		22.2
Balance at end of year	(38.4		)		(44.8	)		(25.1	)
Total stockholders' equity	$	2,665.6			2,302.7			2,096.9
Cash dividends paid per share of common stock	$	0.87			0.77			0.64

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

	2019				2018			2017
Cash flows from operating activities:
Net earnings	$	790.9			751.9			578.6
Adjustments to reconcile net earnings to net cash provided by operating activities, net of acquisitions:
Depreciation of property and equipment	144.6				134.1			123.6
Gain on sale of property and equipment	(1.2		)		(0.5	)		(1.0	)
Bad debt expense	5.5				8.1			8.2
Deferred income taxes	15.0				33.8			(30.0	)
Stock-based compensation	5.7				5.1			5.2
Amortization of intangible assets	4.1				4.1			3.8
Changes in operating assets and liabilities, net of acquisitions:
Trade accounts receivable	(30.4		)		(120.3	)		(103.7	)
Inventories	(84.4		)		(193.3	)		(76.3	)
Other current assets	(10.4		)		(28.9	)		(15.6	)
Accounts payable	(0.8		)		46.1			36.3
Accrued expenses	10.7				46.8			37.6
Income taxes	(7.7		)		(15.5	)		19.4
Other	1.1				2.7			(0.9	)
Net cash provided by operating activities	842.7				674.2			585.2
Cash flows from investing activities:
Purchases of property and equipment	(246.4		)		(176.3	)		(119.9	)
Proceeds from sale of property and equipment	6.6				9.5			7.4
Cash paid for acquisitions	—				(3.7	)		(58.7	)
Other	0.1				(3.4	)		(8.1	)
Net cash used in investing activities	(239.7		)		(173.9	)		(179.3	)
Cash flows from financing activities:
Proceeds from debt obligations	910.0				980.0			1,015.0
Payments against debt obligations	(1,065.0		)		(895.0	)		(980.0	)
Proceeds from exercise of stock options	58.5				13.4			9.5
Purchases of common stock	—				(103.0	)		(82.6	)
Payments of dividends	(498.6		)		(441.9	)		(369.1	)
Net cash used in financing activities	(595.1		)		(446.5	)		(407.2	)
Effect of exchange rate changes on cash and cash equivalents	(0.2		)		(3.5	)		5.5
Net increase in cash and cash equivalents	7.7				50.3			4.2
Cash and cash equivalents at beginning of year	167.2				116.9			112.7
Cash and cash equivalents at end of year	$	174.9			167.2			116.9
Supplemental disclosure of cash flow information:
Cash paid for interest	$	13.9			12.6			8.7
Net cash paid for income taxes	$	242.7			215.3			304.1

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 over 3,200 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 determine if an arrangement contains a lease at inception. Operating leases are included in our operating lease right-of-use ('ROU') assets, the current portion of operating lease liabilities, and the operating lease liabilities in our Consolidated Balance Sheets.

The ROU assets represent our right to control the use of an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating lease ROU assets also include any prepaid lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the lease term.

Many of our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and nonlease components (e.g., common-area or other maintenance costs) which are accounted for as a single lease component as we have elected the practical expedient to group lease and nonlease components for all leases. Our pick-up truck leases typically have a non-cancelable lease term of less than one year and therefore, we have elected the practical expedient to exclude these short-term leases from our ROU assets and lease liabilities.

Most leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.

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.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

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.

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.

Stock Split

On April 17, 2019, the board of directors approved a two-for-one stock split of the company's outstanding common stock. Holders of the company's common stock, par value $0.01 per share, at the close of business on May 2, 2019, received one additional share of common stock for every share of common stock they owned. The stock split took effect at the close of business on May 22, 2019. All historical common stock share and per share information for all periods presented in the accompanying consolidated financial statements and notes thereto have been retroactively adjusted to reflect the stock split.

Recently Adopted Accounting Pronouncements

Effective January 1, 2019, we adopted the Financial Accounting Standards Board ('FASB') Accounting Standards Update ('ASU') 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. 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 included 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, which we elected. As a result of the adoption of ASC 842 on January 1, 2019, we recorded both operating lease ROU assets of $227.5 and lease liabilities of $228.3. The adoption of ASC 842 had an immaterial impact on our Consolidated Statement of Earnings and Consolidated Statement of Cash Flows for the year ended December 31, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which allowed us to carry forward the historical lease classification.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the way entities recognize impairment of most financial assets. This update is effective for periods beginning after December 15, 2019.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Short-term and long-term financial assets, as defined by the standard, are impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected. We have evaluated the requirements of this standard on our financial assets and have concluded that the adoption of this ASU, beginning January 1, 2020, will have an immaterial impact on our consolidated financial statements.

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 selling location 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
	2019				2018			2017
United States	$	4,568.9			4,285.5			3,842.9
Canada and Mexico	606.8				530.8			432.3
North America	5,175.7				4,816.3			4,275.2
All other foreign countries	158.0				148.8			115.3
Total revenues	$	5,333.7			4,965.1			4,390.5

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

	Twelve-month period
	2019			2018			2017
Manufacturing	67.5	%		66.7	%		66.5	%
Non-residential construction	12.9	%		13.1	%		13.0	%
Other	19.6	%		20.2	%		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		2019			2018			2017
Fasteners(2)	1967		34.2	%		34.9	%		35.6	%
Tools	1993		9.9	%		10.0	%		10.1	%
Cutting tools	1996		5.7	%		5.7	%		5.8	%
Hydraulics & pneumatics	1996		6.8	%		6.8	%		6.8	%
Material handling	1996		5.9	%		5.8	%		5.9	%
Janitorial supplies	1996		7.8	%		7.6	%		7.3	%
Electrical supplies	1997		4.7	%		4.7	%		4.9	%
Welding supplies	1997		4.2	%		4.1	%		4.2	%
Safety supplies	1999		17.9	%		17.2	%		16.3	%
Other			2.9	%		3.2	%		3.1	%
			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			2019				2018
Land	—			$	41.8			36.3
Buildings and improvements	15 to 40			423.7				323.1
Automated distribution and warehouse equipment	5 to 30			244.5				229.1
Shelving, industrial vending, and equipment	3 to 10			1,036.2				927.6
Transportation equipment	3 to 5			88.7				77.9
Construction in progress	—			132.0				152.2
				1,966.9				1,746.2
Less accumulated depreciation				(943.7		)		(821.4	)
Property and equipment, net				$	1,023.2			924.8

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

	2019				2018			2017
United States	$	1,238.4			947.7			919.5
Canada and Mexico	72.2				43.0			42.8
North America	1,310.6				990.7			962.3
All other foreign countries	32.1				14.6			12.5
Total long-lived assets	$	1,342.7			1,005.3			974.8

Note 4. Accrued Expenses

Accrued expenses at year end consisted of the following:

	2019				2018
Employee payroll and related taxes	$	28.7			27.6
Employee bonuses and commissions	17.9				22.8
Profit sharing contribution	13.8				13.0
Insurance reserves	41.1				37.6
Indirect taxes	67.4				63.6
Customer promotions and marketing	52.2				50.9
Other	30.4				25.3
Accrued expenses	$	251.5			240.8

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

Note 5. Stockholders' Equity

Dividends

On January 16, 2020, our board of directors declared a quarterly dividend of $0.25 per share of common stock to be paid in cash on February 28, 2020 to shareholders of record at the close of business on January 31, 2020. We paid aggregate annual dividends per share of $0.87, $0.77, and $0.64 in 2019, 2018, and 2017, respectively.

Stock Options

Effective January 2, 2020, the compensation committee of our board of directors granted to our employees options to purchase a total of 877,299 shares of our common stock at an exercise strike price of $38.00 per share. The closing stock price on the effective date of the grant was $37.23 per share. On the same date, certain of our non-employee directors elected to forgo all or a portion of the 2020 annual cash retainer in exchange for options to acquire a total of 24,964 shares of our common stock at an exercise price of $38.00 per share.

The following tables summarize the details of options granted under our stock option plans that were still outstanding as of December 31, 2019, 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, 2019
Date of Grant	Options Outstanding			Options Exercisable
January 2, 2019	1,316,924			$	26.00			$	25.705			1,279,842			29,010
January 2, 2018	1,087,936			$	27.50			$	27.270			1,019,440			42,370
January 3, 2017	1,529,578			$	23.50			$	23.475			1,197,606			332,132
April 19, 2016	1,690,880			$	23.00			$	22.870			1,220,524			447,166
April 21, 2015	1,786,440			$	21.00			$	20.630			833,593			444,589
April 22, 2014	1,910,000			$	28.00			$	25.265			599,128			357,268
April 16, 2013	410,000			$	27.00			$	24.625			97,472			58,722
April 17, 2012	2,470,000			$	27.00			$	24.505			547,112			440,310
April 19, 2011	820,000			$	17.50			$	15.890			12,500			12,500
Total	13,021,758											6,807,217			2,164,067

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, 2019	2.5	%		5.00		2.9	%		23.96	%		$	4.40
January 2, 2018	2.2	%		5.00		2.3	%		23.45	%		$	5.02
January 3, 2017	1.9	%		5.00		2.6	%		24.49	%		$	4.20
April 19, 2016	1.3	%		5.00		2.6	%		26.34	%		$	4.09
April 21, 2015	1.3	%		5.00		2.7	%		26.84	%		$	3.68
April 22, 2014	1.8	%		5.00		2.0	%		28.55	%		$	4.79
April 16, 2013	0.7	%		5.00		1.6	%		37.42	%		$	6.33
April 17, 2012	0.9	%		5.00		1.4	%		39.25	%		$	6.85
April 19, 2011	2.1	%		5.00		1.6	%		39.33	%		$	5.60

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, 2019	7,999,264			$	24.765			5.61
Granted	1,316,924			$	26.000			9.00
Exercised	(2,325,073	)		$	25.150
Cancelled/forfeited	(183,898	)		$	24.630
Outstanding as of December 31, 2019	6,807,217			$	24.890			6.09
Exercisable as of December 31, 2019	2,164,067			$	24.510			4.30

	Options Outstanding			Exercise Price(1)				Remaining Life(2)
Outstanding as of January 1, 2018	7,897,816			$	24.140			5.89
Granted	1,087,936			$	27.500			9.00
Exercised	(620,766	)		$	21.655
Cancelled/forfeited	(365,722	)		$	24.430
Outstanding as of December 31, 2018	7,999,264			$	24.765			5.61
Exercisable as of December 31, 2018	3,108,756			$	25.530			3.69

(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, 2019, 2018, and 2017 was $20.2, $4.2, and $6.9, 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, 2019, there was $13.1 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 3.82 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 2019, 2018, and 2017 was $5.9, $5.3, and $4.2, respectively.

Total stock-based compensation expense related to our employee stock option plan was $5.7, $5.1, and $5.2 for 2019, 2018, and 2017, respectively.

Shares Outstanding

Shares of common stock outstanding were as follows:

	2019			2018			2017
Balance at beginning of year	571,803,838			575,183,072			578,323,848
Stock options exercised	2,325,073			620,766			659,224
Purchases of common stock	—			(4,000,000	)		(3,800,000	)
Balance at end of year	574,128,911			571,803,838			575,183,072

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

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	2019			2018			2017
Basic weighted average shares outstanding	573,202,152			573,933,834			576,416,870
Weighted shares assumed upon exercise of stock options	1,239,476			391,694			268,596
Diluted weighted average shares outstanding	574,441,628			574,325,528			576,685,466

Summary of Anti-dilutive Options Excluded	2019				2018			2017
Options to purchase shares of common stock	—				3,159,514			7,048,802
Weighted average exercise prices of options	$	—			27.510			24.925

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.

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 $13.8, $13.0, and $10.6 for 2019, 2018, and 2017, respectively.

Note 7. Income Taxes

Earnings before income taxes were derived from the following sources:

	2019				2018			2017
Domestic	$	977.6			905.0			809.4
Foreign	66.1				82.0			63.7
Earnings before income taxes	$	1,043.7			987.0			873.1

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

2019:	Current				Deferred			Total
Federal	$	177.4			11.3			188.7
State	41.6				0.2			41.8
Foreign	22.1				0.2			22.3
Income tax expense	$	241.1			11.7			252.8

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

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

2017:	Current				Deferred			Total
Federal	$	270.6			(33.1	)		237.5
State	33.2				3.3			36.5
Foreign	20.5				(0.0	)		20.5
Income tax expense	$	324.3			(29.8	)		294.5

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

	2019				2018			2017
U.S. federal statutory income tax rate	21.0		%		21.0	%		35.0	%
U.S. federal income tax expense at statutory rate	$	219.2			207.3			305.6
Increase (decrease) attributed to:
State income taxes, net of federal benefit	32.8				30.2			21.5
Transition tax	—				1.2			6.5
Remeasurement of deferred taxes for Tax Act	—				(11.5	)		(30.8	)
Other, net	0.8				7.9			(8.3	)
Total income tax expense	$	252.8			235.1			294.5
Effective income tax rate	24.2		%		23.8	%		33.7	%

The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at year end consisted of the following:

	2019				2018
Deferred income tax assets (liabilities):
Inventory costing and valuation methods	$	4.3			4.2
Allowance for doubtful accounts	2.7				3.2
Insurance reserves	9.1				8.1
Customer promotions	1.9				1.9
Stock-based compensation	3.9				5.6
Operating lease liabilities	62.5				—
Federal and state benefit of uncertain tax positions	0.8				0.8
Foreign net operating loss and credit carryforwards	3.2				3.2
Foreign valuation allowances	(2.8		)		(2.7	)
Other, net	(0.0		)		1.3
Total deferred income tax assets	85.6				25.6
Property and equipment	(114.7		)		(104.7	)
Operating lease ROU assets	(61.7		)		—
Total deferred income tax liabilities	(176.4		)		(104.7	)
Deferred income tax liabilities	$	(90.8	)		(79.1	)

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

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

	2019				2018
Balance at beginning of year:	$	5.3			4.4
Increase related to prior year tax positions	0.2				1.8
Decrease related to prior year tax positions	(0.2		)		(0.6	)
Increase related to current year tax positions	4.7				0.7
Decrease related to statute of limitation lapses	(1.4		)		(0.9	)
Settlements	0.0				(0.1	)
Balance at end of year:	$	8.6			5.3

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 2019 and 2018 liability is included in deferred income taxes in the Consolidated Balance Sheets.

We file income tax returns in the United States federal jurisdiction, all states, and various local and foreign jurisdictions. 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 with limited exception, before 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. 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 was 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 $288.1 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. Further, the leases do not contain contingent rent provisions. We also lease certain semi-tractors, pick-up trucks, and computer equipment under operating leases.

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 $90.0. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote.

Fastenal Company and Subsidiaries

Notes to Consolidated Financial Statements—Continued

The cost components of our operating leases were as follows for the period ended December 31, 2019:

	Twelve-month Period
	Leased Facilities and Equipment				Leased Vehicles			Total
Operating lease cost	$	104.0			14.1			118.1
Variable lease cost	10.0				1.9			11.9
Short-term lease cost	—				27.4			27.4
Total	$	114.0			43.4			157.4

Variable lease costs are excluded from ROU assets and lease liabilities and consist primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities and equipment which are paid based on actual costs incurred by the lessor as well as variable mileage costs related to our leased vehicles.

Maturities of our lease liabilities for all operating leases are as follows as of December 31, 2019:

	Leased Facilities and Equipment				Leased Vehicles			Total
2020	$	88.3			12.7			101.0
2021	63.2				8.5			71.7
2022	39.5				6.0			45.5
2023	22.5				2.9			25.4
2024	10.0				0.1			10.1
2025 and thereafter	3.7				—			3.7
Total lease payments	$	227.2			30.2			257.4
Less: Imputed interest	(10.8		)		(1.0	)		(11.8	)
Present value of lease liabilities	$	216.4			29.2			245.6

The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of December 31, 2019:

Remaining lease term and discount rate:	December 31, 2019
Weighted average remaining lease term (years)
Leased facilities and equipment	3.26
Leased vehicles	2.89
Weighted average discount rate
Lease facilities and equipment	3.18%
Leased vehicles	2.70%

Supplemental cash flow information related to our operating leases was as follows for the period ended December 31, 2019:

	Twelve-month Period
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases	$	117.2
Leased assets obtained in exchange for new operating lease liabilities	116.1

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:

	2019				2018
Outstanding loans under unsecured revolving credit facility	$	210.0			365.0
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	345.0				500.0
Less: Current portion of debt	(3.0		)		(3.0	)
Long-term debt	$	342.0			497.0
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, 2019 was approximately 2.7%. 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, 2019, 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)

2019:	Net Sales				Gross Profit			Pre-tax Earnings			Net Earnings			Basic Net Earnings per Share		(1)	Diluted Net Earnings per Share		(1)
First quarter	$	1,309.3			624.7			257.5			194.1			0.34			0.34
Second quarter	1,368.4				641.2			271.4			204.6			0.36			0.36
Third quarter	1,379.1				651.1			278.4			213.5			0.37			0.37
Fourth quarter	1,276.9				598.4			236.4			178.7			0.31			0.31
Total	$	5,333.7			2,515.4			1,043.7			790.9			1.38			1.38

2018:	Net Sales				Gross Profit			Pre-tax Earnings			Net Earnings			Basic Net Earnings per Share		(1)	Diluted Net Earnings per Share		(1)
First quarter	$	1,185.8			577.6			231.9			174.3			0.30			0.30
Second quarter	1,267.9				617.7			265.9			211.2			0.37			0.37
Third quarter	1,279.8				615.8			259.4			197.6			0.34			0.34
Fourth quarter	1,231.6				587.8			229.8			168.8			0.29			0.29
Total	$	4,965.1			2,398.9			987.0			751.9			1.31			1.31

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

End of Notes to Consolidated Financial Statements