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

BUSINESS AND OPERATIONAL OVERVIEW:
Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of approximately 2,600 company owned stores. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes both original equipment manufacturers (OEM) and maintenance and repair operations (MRO). The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our product include farmers, ranchers, truckers, railroads, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our stores and customers are primarily located in North America.
In the past decade, we have experienced periods of inflation and deflation related to steel prices (this is meaningful to our business because approximately 50% of our sales consist of some type of fastener - nuts, bolts, screws, etc. - most of which are made of steel). In the period from 2003 to the fall of 2008, we experienced inflation in steel prices, this was most pronounced in 2008. In the fourth quarter of 2008, and throughout much of 2009, we experienced deflation in steel prices. When the swings are dramatic, this can hurt our gross margins because we are selling expensive inventory on the shelf at declining prices. This hurt our gross margins in 2009. The drop in energy costs (this is meaningful to our business because we are a store based distributor with a large trucking fleet) over the same period provided some relief, but it was small in comparison to the impact of the steel deflation. The deflation of 2009 ended and these conditions normalized and allowed our gross margins to recover into a more normal range beginning in 2010. (See later discussion on gross margins.)
Similar to previous quarters, we have included comments regarding several aspects of our business:
(1) Monthly sales changes, sequential trends, and end market performance
- a recap of our recent sales trends and some insight into the activities with different end markets.

(2) Growth drivers of our business - a recap of how we grow our business.

(3) Profit drivers of our business - a recap of how we increase our profits.

(4) Statement of earnings information - a recap of the components of our income statement.

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

While reading these items, it is helpful to appreciate several aspects of our marketplace: (1) it's big, the North American marketplace for industrial supplies is estimated to be in excess of $160 billion per year (and we have expanded beyond North America), (2) no company has a significant portion of this market, (3) many of the products we sell are individually inexpensive, (4) when our customer needs something quickly or unexpectedly our local store is a quick source, and (5) the cost to manage and procure these products can be significant, and (6) the cost to move these products, many of which are bulky, can also be significant.
Our motto is Growth through Customer Service. This is important given the points noted above. We believe in efficient markets - to us, this means we can grow our market share if we provide the greatest value to the customer. We believe our ability to grow is amplified if we can service our customer at the closest economic point of contact.
The concept of growth is simple, find more customers every day and increase your activity with them. However, execution is hard work. First, we recruit service minded individuals to support our customers and their business. Second, we operate in a decentralized fashion to help identify the greatest value for our customers. Third, we build a great machine behind the store to operate efficiently and to help identify new business solutions. Fourth, we do these things every day. Finally, we strive to generate strong profits; these profits produce the cash flow necessary to fund the growth and to support the needs of our customers.

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

                       Nine-month period          Three-month period
                      2012           2011          2012         2011
Net sales         $ 2,376,342     2,069,055     $ 802,577     726,742
Percentage change        14.9 %        22.0 %        10.4 %      20.4 %

The increase in net sales in the first nine months of 2012 and 2011 came primarily from higher unit sales. Our growth in net sales was impacted by inflationary price changes in our products, but the impact was limited. Our growth in net sales was not meaningfully impacted by the introduction of new products or services, with one exception, our FAST SolutionsSM (industrial vending) initiative did stimulate faster growth (discussed later in this document). The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. The growth in net sales at the older store locations was due to the growth drivers of our business (discussed later in this document), and in the case of 2011, the moderating impacts of the recessionary environment. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.3 % in the first nine months of 2012 and increased our daily sales growth rate by 0.9% in the first nine months of 2011. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.2% in the third quarter of 2012 and increased our daily sales growth by 0.9% in the third quarter of 2011.
Our sales growth of 10.4% in the third quarter of 2012 was impacted by the loss of one business day versus the prior year (63 days versus 64). Our sales growth adjusted to a daily basis was 12.2% in the third quarter of 2012; the calendar change also impacted the sales by store age table below.
The stores opened greater than two years represent a consistent 'same store' view of our business (store sites opened as follows: 2012 group - opened 2010 and earlier, and 2011 group - opened 2009 and earlier). However, the impact of the economy is best reflected in the growth performance of our stores opened greater than five years (store sites opened as follows: 2012 group - opened 2007 and earlier, and 2011 group - opened 2006 and earlier) and opened greater than ten years (store sites opened as follows: 2012 group - opened 2002 and earlier, and 2011 group - opened 2001 and earlier). These two groups of stores are more cyclical due to the increased market share they enjoy in their local markets. The daily sales change for each of these groups was as follows:

                                Nine-month period        Three-month period
                                2012         2011        2012          2011
Store Age
Opened greater than 2 years     12.6 %        18.0 %      9.0 %         16.8 %
Opened greater than 5 years     11.6 %        17.2 %      8.1 %         15.6 %
Opened greater than 10 years     9.9 %        14.9 %      6.6 %         13.2 %

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

SALES BY PRODUCT LINE:
The mix of sales from the original fastener product line and from the other
product lines was as follows:
                        Nine-month period       Three-month period
                         2012        2011        2012         2011
Fastener product line    44.4 %      47.3 %      43.5 %        46.5 %
Other product lines      55.6 %      52.7 %      56.5 %        53.5 %
                        100.0 %     100.0 %     100.0 %       100.0 %

MONTHLY SALES CHANGES, SEQUENTIAL TRENDS, AND END MARKET PERFORMANCE Note - Daily sales are defined as the sales for the period divided by the number
of business days (in the United States) in the period.
This section focuses on three distinct views of our business - monthly sales changes, sequential trends, and end market performance. The first discussion regarding monthly sales changes provides a good mechanical view of our business based on the age of our stores. The second discussion provides a framework for understanding the sequential trends (that is, comparing a period to the immediately preceding period) in our business. Finally, we believe the third discussion regarding end market performance provides insight into activities with our various types of customers.

MONTHLY SALES CHANGES:
All company sales - During the months in 2012, 2011, and 2010, all of our
selling locations, when combined, had daily sales growth rates of (compared to
the comparable month in the preceding year):
     Jan.   Feb.   Mar.   Apr.    May   June   July   Aug.   Sept.   Oct.   Nov.   Dec.
2012 21.3 % 20.0 % 19.3 % 17.3 % 13.1 % 14.0 % 12.1 % 12.0 %  12.9 %
2011 18.8 % 21.5 % 22.8 % 23.2 % 22.6 % 22.5 % 22.4 % 20.0 %  18.8 % 21.4 % 22.2 % 21.2 %
2010  2.4 %  4.4 % 12.1 % 18.6 % 21.1 % 21.1 % 24.4 % 22.1 %  23.5 % 22.4 % 17.9 % 20.9 %

The growth in the first three months of 2012 generally continued the relative strength we saw in 2011 and in most of 2010. The April to June 2012 time frame experienced a reduction in our daily sales growth rate as the market we sell into slowed (see further discussion in sequential trends and end market performance). This slow down continued into the July to September 2012 time frame. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.3% during the first nine months of 2012 (this lowered growth in the first, second, and third quarters was 0.1%, 0.4%, and 0.2% respectively). This was a sharp contrast to 2011 and 2010, when changes in foreign currencies increased our growth in the first nine months by 0.9% and 0.3%, respectively.
Stores opened greater than two years - Our stores opened greater than two years (store sites opened as follows: 2012 group - opened 2010 and earlier, 2011 group
- opened 2009 and earlier, and 2010 group - opened 2008 and earlier) represent a consistent 'same-store' view of our business. During the months in 2012, 2011, and 2010, the stores opened greater than two years had daily sales growth rates of (compared to the comparable month in the preceding year):
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

2012 18.8 % 17.1 % 16.8 % 14.5 % 10.1 % 11.1 %  9.1 %  8.6 %   9.8 %
2011 16.0 % 18.4 % 19.4 % 19.6 % 19.2 % 19.1 % 18.7 % 16.5 %  15.2 % 18.0 % 18.5 % 17.5 %
2010  0.6 %  2.3 %  9.6 % 16.3 % 18.5 % 18.3 % 21.3 % 19.2 %  19.8 % 18.8 % 14.1 % 16.8 %

Stores opened greater than five years - The impact of the economy, over time, is best reflected in the growth performance of our stores opened greater than five years (store sites opened as follows: 2012 group - opened 2007 and earlier, 2011 group - opened 2006 and earlier, and 2010 group - opened 2005 and earlier). This group is more cyclical due to the increased market share they enjoy in their local markets. During the months in 2012, 2011, and 2010, the stores opened greater than five years had daily sales growth rates of (compared to the comparable month in the preceding year):
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

2012 17.4  % 15.8  % 15.7 % 13.7 %  9.0 % 10.2 %  8.3 %  7.9 %   8.5 %
2011 15.3  % 17.9  % 19.2 % 19.1 % 17.9 % 18.2 % 17.3 % 15.2 %  14.5 % 17.0 % 17.4 % 16.9 %
2010 -2.1  % -0.5  %  7.4 % 14.9 % 17.3 % 16.2 % 19.8 % 18.2 %  18.9 % 17.9 % 13.2 % 16.0 %

SEQUENTIAL TRENDS:
We find it helpful to think about the monthly sequential changes in our business using the analogy of climbing a stairway - This stairway has several predictable landings where there is a pause in the sequential gain (i.e. April, July, and October to December), but generally speaking, climbs from January to October. The October landing then establishes the benchmark for the start of the next year.
History has identified these landings in our business cycle. They generally relate to months with impaired business days (certain holidays). The first landing centers on Easter, which alternates between March and April (Easter occurred in April in 2012, 2011, and 2010), the second landing centers on July 4th, and the third landing centers on the approach of winter with its seasonal impact on primarily our construction business and with the Christmas / New Year holidays. The holidays we noted impact the trends because they either move from month-to-month or because they move around during the week. The table below shows the pattern to our sequential change in our daily sales. The line labeled 'Past' is an historical average of our sequential daily sales change for the period 1998 to 2003. We chose this time frame because it had similar characteristics, a weaker industrial economy in North America, and could serve as a benchmark for a possible trend line. The '2012', '2011', and '2010' lines represent our actual sequential daily sales changes. The '12Delta', '11Delta', and '10Delta' lines indicate the difference between the 'Past' and the actual results in the respective year.

                                                                                                        Cumulative change
                        Jan.(1)   Feb.    Mar.   Apr.     May    June    July    Aug.   Sept.   Oct.   from Jan. to Sept.
Past                      0.9  %  3.3  %  2.9 % -0.3  %  3.4  %  2.8  % -2.3  %  2.6  %  2.6 % -0.7  %         15.9  %

2012                     -0.3  %  0.5  %  6.4 % -0.8  %  0.5  %  2.5  % -2.7  %  1.3  %  4.3 %                 12.5  %
12Delta                  -1.2  % -2.8  %  3.5 % -0.5  % -2.9  % -0.3  % -0.4  % -1.3  %  1.7 %                 -3.4  %

2011                     -0.2  %  1.6  %  7.0 %  0.9  %  4.3  %  1.7  % -1.0  %  1.4  %  3.4 %  0.7  %         20.8  %
11Delta                  -1.1  % -1.7  %  4.1 %  1.2  %  0.9  % -1.1  %  1.3  % -1.2  %  0.8 %  1.4  %          4.9  %

2010                      2.9  % -0.7  %  5.9 %  0.6  %  4.8  %  1.7  % -1.0  %  3.5  %  4.5 % -1.5  %         20.8  %
10Delta                   2.0  % -4.0  %  3.0 %  0.9  %  1.4  % -1.1  %  1.3  %  0.9  %  1.9 % -0.8  %          4.9  %

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

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

Several observations stand out while viewing the 2012 sequential pattern: (1) The direction of the historical sequential pattern (increased daily sales on a sequential basis in February, March, May, June, August, and September and decreased daily sales on a sequential basis in April and July) has played out each month; however, the cumulative growth in the daily sales from January to September has fallen short of the benchmark figure and of the actual results in 2011 and 2010. (2) The magnitude of the February and May '12Delta' of approximately -2.8% was similar. This fact, as well as the choppiness of the year in general, has caused us to approach the year with a conservative tone. (3) The weakness in the first eight months of 2012 was amplified by changes in foreign currencies (primarily Canada) relative to the U.S. dollar.

END MARKET PERFORMANCE:
Fluctuations in end market business - The sequential trends noted above were
directly linked to fluctuations in our end markets. To place this in perspective
- approximately 50% of our business has historically been with customers engaged
in some type of manufacturing. The daily sales to these customers grew in the
first, second, third, and fourth quarters (when compared to the same quarter in
the previous year), and for the year, as follows:
       Q1       Q2       Q3       Q4     Annual
2012 20.3 %   15.8 %   14.0 %
2011 15.5 %   18.5 %   18.3 %   21.0 %    20.0 %
2010 15.7 %   29.8 %   30.6 %   17.7 %    22.4 %

Our manufacturing business consists of two subsets: the industrial production business (this is business where we supply products that become part of the finished goods produced by our customers) and the maintenance portion (this is business where we supply products that maintain the facility or the equipment of our customers engaged in manufacturing). The industrial business is more fastener centered, while the maintenance portion is represented by all product categories.
In the second and third quarters of 2012, the decrease in the rate of growth was more pronounced in our industrial production business. This is in sharp contrast to the first quarter of 2012 where the growth was more pronounced in the industrial production business, a trend that had also existed in 2011 and 2010. The first quarter and prior quarters were a direct counter to the 2009 contraction, which was more severe in our industrial production business and less severe in the maintenance portion of our manufacturing business. The best way to understand the change in our industrial production business is to examine the results in our fastener product line. In the first three months of 2012, the daily sales growth in our fastener product line was approximately 15.4%. This dropped to 10.5%, 6.1%, and 8.6% in April, May, and June, respectively, and averaged 6.0% in the third quarter. By contrast, the best way to understand the change in the maintenance portion of the manufacturing business is to examine the results in our non-fastener product lines. In the first three months of 2012, the daily sales growth in our non-fastener business was approximately 25.1%. This dropped to 24.4%, 19.0%, and 19.6% in April, May, and June, respectively, and averaged 18.0% in the third quarter.
The patterns related to the industrial production business, as noted above, are influenced by the movements noted in the Purchasing Manufacturers Index ('PMI') published by the Institute for Supply Management (http://www.ism.ws/), which is a composite index of economic activity in the manufacturing sector. The PMI in 2012, 2011, and 2010 was as follows:
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

2012 54.1  52.4  53.4  54.8  53.5  49.7  49.8  49.6   51.5
2011 59.9  59.8  59.7  59.7  54.2  55.8  51.4  52.5   52.5  51.8  52.2  53.1
2010 56.7  55.8  59.3  59.0  58.8  56.0  55.7  57.4   56.4  57.0  58.0  57.3

Our non-residential construction customers have historically represented 20% to 25% of our business. The daily sales to these customers grew or contracted in the first, second, third, and fourth quarters (when compared to the same quarter in the previous year), and for the year, as follows:

A graph of the sequential daily sales trends to these two end markets in 2012, 2011, and 2010, starting with a base of '100' in the previous October and ending with the next October, would be as follows:

GROWTH DRIVERS OF OUR BUSINESS
We grow by continuously adding customers and by increasing the activity with each customer. We believe this growth is enhanced by our close proximity to our customers, which allows us to provide a range of services and product availability that our competitors can't easily match. Historically, we expanded our reach by opening stores at a very fast pace. These openings were initially in the United States, but expanded beyond the United States beginning in the mid 1990's.
In our first ten years of being public (1987 to 1997), we opened stores at a rate approaching 30% per year. In the next ten years, we opened stores at an annual rate of approximately 10% to 15% and, over the last five years, at a rate of approximately 3% to 8% (we currently expect approximately 85 stores in 2012, or approximately 3.3%). As we gained proximity to more customers, we continued to diversify our growth drivers - this was done to provide existing store personnel with more tools to grow their business organically - the results of this are reflected in our earlier discussion on sales growth at stores opened greater than five years. In the early 1990's, we began to expand our product lines, and we added new product knowledge to our bench. This was our first big effort to diversify our growth drivers. The next step began in the mid to late 1990's when we began to add sales personnel with certain specialties or focus. This began with our National Accounts group in 1995, and, over time, has expanded to include individuals dedicated to: (1) sales related to our internal manufacturing division, (2) government sales, (3) internet sales, (4) specific products (most recently metal working), and (5) FAST SolutionsSM (industrial vending). Another step occurred at our sales locations (this includes Fastenal stores as well as strategic account stores and in-plant locations) and at our distribution centers, and began with a targeted merchandising and inventory placement strategy that included our 'Customer Service Project' approximately ten years ago and our 'Master Stocking Hub' initiative approximately five years ago. This strategy allowed us to better target where to stock certain products
(local store, regional distribution center, master stocking hub, or supplier)
and allowed us to improve our fulfillment and our ability to serve a broader range of customers.
Our FAST SolutionsSM (industrial vending) operation is a rapidly expanding component of our business. We believe industrial vending is the next logical chapter in the Fastenal story, we also believe it has the potential to be transformative to industrial distribution, and that we have a 'first mover' advantage. We are investing aggressively to maximize this advantage. At our investor day in May 2011, we discussed our progress with industrial vending. In addition to our discussion regarding progress, we discussed our goals with the rollout of the industrial vending machines. One of the goals we identified related to our rate of 'machine signings' (the first category below) - our goal was simple, sign 2,500+ machines per quarter (or an annualized run rate of 10,000 machines). In 2012, we hit our annual goal of 10,000 machines during July, and the momentum has continued as we finished the third quarter. We intend to continue our aggressive push with industrial vending in 2013 and, to this end, expect to open approximately 50 - 100 stores in 2013, or an annual rate of new store openings of 2% to 4%. In addition, during 2012 we developed plans to
(1) reinvigorate our fastener growth and to (2) improve the performance (growth) at under performing locations. The following table includes some statistics regarding our industrial vending business:

                                                Q1         Q2         Q3        Q4
Number of vending machines in          2012   4,568      4,669      5,334
 contracts signed during the period1   2011   1,405      2,107      2,246     2,084
                                       2010     257        420        440       792
Cumulative machines installed2         2012   9,798     13,036     17,013
                                       2011   2,659      3,867      5,642     7,453
                                       2010     892      1,184      1,515     1,925
Percent of total net sales to          2012    17.8 %     20.8 %     23.2 %
 customers with vending machines3      2011     8.9 %     10.5 %     13.1 %    15.7 %
                                       2010     3.4 %      4.6 %      6.1 %     7.5 %
Daily sales growth to customers        2012    33.9 %     34.3 %     32.9 %
 with vending machines4                2011    50.6 %     43.9 %     42.5 %    40.7 %
                                       2010    37.4 %     54.0 %     56.4 %    60.2 %

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

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

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

4 The growth in total sales (vended and traditional) to customers currently using a vending solution compared to the

comparable period in the preceding year.
We are pleased with the increases in the number of vending machine contracts signed, and with our ability to install machines. We increased our installed machine base by 3,977 machines (17,013 versus 13,036) in the third quarter of 2012, by 1,775 machines (5,642 versus 3,867) in the third quarter of 2011, and by 331 machines (1,515 versus 1,184) in the third quarter of 2010.
PROFIT DRIVERS OF OUR BUSINESS
We grow our profits by continuously working to grow sales and to improve our relative profitability. We also grow our profits by allowing our inherent profitability to shine through - we refer to this as the 'pathway to profit'. The distinction is important.
We achieve improvements in our relative profitability by increasing our gross margin, by structurally lowering our operating expenses, or both. We advance on the 'pathway to profit' by increasing the average store size (measured in terms of monthly sales), and by allowing the changing store mix to improve our profits. This is best explained by comparing the varying profitability of our 'traditional' stores in the table below. The average store size for the group, and the average age, number of stores, and pre-tax earnings data by store size for the third quarter of 2012, 2011, and 2010, respectively, were as follows: . . .