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

BUSINESS AND OPERATIONAL OVERVIEW:
Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of approximately 2,700 company owned stores. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes both original equipment manufacturers (OEM) and maintenance and repair operations (MRO). The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our product include farmers, truckers, railroads, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our stores and customers are primarily located in North America. Like most industrial and construction centric organizations, we have endured a roller coaster ride over the last several years. The third quarter of 2008 included the final months of an inflationary period related to both steel prices (between 40% and 50% of our sales consist of some type of fastener - nuts, bolts, screws, etc. - most of which are made of steel) and energy prices (a meaningful item for us given the amount of energy that is necessary in the production of our products and in the transportation of our products across North America).
In the fourth quarter of 2008, and throughout much of 2009, this inflation turned to deflation. 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 over the same period provided some relief, but it was small in comparison to the impact of deflation. The deflation of 2009 ended and these conditions normalized and allowed our gross margins to recover in 2010 and 2011. (See later discussion on gross margins.)
The discussion that follows includes information regarding our sales growth and our sales by product line during 2012. This information provides a summary view to understand the dynamics of the year. However, we feel the real story is told in the monthly sales change, sequential trend, and end market information that follows - that information explains the real impact of the market dynamics affecting us over this period of uncertainty.
Over the last several years, we have continued to make significant investments in (1) store locations, (2) national accounts, (3) government sales,
(4) internal manufacturing support, (5) international operations (now over 10% of our sales), (6) FAST SolutionsSM (industrial vending), (7) product expansion (with particular emphasis on metalworking products and on exclusive brands),
(8) additional sales specialists to support safety products, metalworking products, and our manufacturing operations, and (9) additional sales operational support to focus on under performing stores and under performing industrial vending. We are excited about the prospects of each. As always, the 'pathway to profit' is the cornerstone of our business evolution, and it influences everything we do. Remember, our business centers on our 2,700 stores - their individual success leads to the success of the entire organization over time. As always, we will continue to work to complete this task and maintain our goal of Growth through Customer Service.

SALES GROWTH:
Net sales and growth rates in net sales were as follows:
                      2012           2011          2010
Net sales         $ 3,133,577     2,766,859     2,269,471
Percentage change        13.3 %        21.9 %        17.6 %

The increase in net sales in 2012 came primarily from higher unit sales. Our growth in net sales was impacted by price changes in our products, but the impact was limited. Our growth in net sales was not meaningfully impacted by the introduction of new products or services, but was helped by initiatives such as FAST SolutionsSM (industrial vending). The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. The growth in net sales at the older store locations was hindered by weakness in the industrial production and non-residential construction industries served by our Company. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.1% in 2012.

The increase in net sales in 2011 came primarily from higher unit sales. Our growth in net sales was impacted by price changes in our products, but the impact was limited. Our growth in net sales was not meaningfully impacted by the introduction of new products or services, but was helped by initiatives such as FAST SolutionsSM (industrial vending). The higher unit sales resulted primarily from increases in sales at older store locations (discussed below and again later in this document) and to a lesser degree the opening of new store locations in the last several years. The growth in net sales at the older store locations was helped by the moderating impacts of the previous recessionary environment. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar improved our daily sales growth rate by 0.7% in 2011.
The increase in net sales in 2010 came primarily from higher unit sales. Our growth in net sales was not meaningfully impacted by deflationary or inflationary price changes in our products or by the introduction of new products or services. 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 moderating impacts of the previous recessionary environment. The increase in net sales also resulted from the strengthening of the Canadian currency relative to the United States dollar and from our Holo-Krome business, which we acquired in December 2009. These two items added approximately 0.6 and 0.5 percentage points, respectively, to our growth in 2010.
The impact of the economy is best reflected in the growth performance of our stores opened greater than ten years ago (store sites opened as follows: 2012 group - opened 2002 and earlier, 2011 group - opened 2001 and earlier, and 2010 group - opened 2000 and earlier) and opened greater than five years ago (store sites opened as follows: 2012 group - opened 2007 and earlier, 2011 group - opened 2006 and earlier, and 2010 group - opened 2005 and earlier). These two groups of stores are more cyclical due to the increased market share they enjoy in their local markets. The stores opened greater than two years ago represent a consistent 'same store' view of our business (store sites opened as follows:
2012 group - opened 2010 and earlier, 2011 group - opened 2009 and earlier, and 2010 group - opened 2008 and earlier). The daily sales change for each of these groups was as follows:

Store Age                    2012    2011    2010
Opened greater than 10 years 8.1%    15.2%   12.5%
Opened greater than 5 years  9.8%    17.1%   13.0%
Opened greater than 2 years  10.8%   17.9%   14.6%

Note: The age groups above are measured as of the last day of each respective year.
Stores opened in 2012 contributed approximately $24,859 (or 0.8%) to 2012 net sales. Stores opened in 2011 contributed approximately $85,318 (or 2.7%) to 2012 net sales and approximately $27,120 (or 1.0%) to 2011 net sales. The rate of growth in sales of store locations generally levels off after they have been open for five years, and, as stated earlier, the sales generated at our older store locations typically vary more with the economy than do the sales of younger stores.
SALES BY PRODUCT LINE:
The approximate mix of sales from the fastener product line and from the other product lines was as follows:

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 %    6.8 %    8.2 %    9.7 %
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 and a half months of 2012 generally continued the relative strength we saw in 2011 and in most of 2010. During 2012 there were two distinct economic slowdowns. The first occurred in the late April/May time frame, and then moderated until September. The second occurred in the October/November time frame. This was exaggerated by an unusual business day comparison in October (23 days in 2012 versus 21 days in 2011 - the maintenance portion of our business is often linked to monthly spend patterns, which are not as business day dependent, this can dilute the daily growth picture given the change in business day divisor) and the impact of Hurricane Sandy. The change in currencies in foreign countries (primarily Canada) relative to the United States dollar lowered our daily sales growth rate by 0.1% during 2012 (this lowered our growth in the first, second, and third quarters by 0.1%, 0.4%, 0.2%, respectively and increased our growth in the fourth quarter by 0.2%). This was a sharp contrast to 2011 and 2010, when changes in foreign currencies increased our growth by 0.7% and 0.6%, 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 %    3.8 %    5.1 %    6.6 %
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 %    2.6 %    4.6 %    5.6 %
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 Oct.
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 %    -4.8  %            7.1  %
12Delta  -1.2  %    -2.8  %     3.5 %    -0.5  %    -2.9  %    -0.3  %    -0.4  %    -1.3  %     1.7 %    -4.1  %           -8.8  %
2011     -0.2  %     1.6  %     7.0 %     0.9  %     4.3  %     1.7  %    -1.0  %     1.4  %     3.4 %     0.7  %           21.7  %
11Delta  -1.1  %    -1.7  %     4.1 %     1.2  %     0.9  %    -1.1  %     1.3  %    -1.2  %     0.8 %     1.4  %            5.8  %
2010      2.9  %    -0.7  %     5.9 %     0.6  %     4.8  %     1.7  %    -1.0  %     3.5  %     4.5 %    -1.5  %           19.0  %
10Delta   2.0  %    -4.0  %     3.0 %     0.9  %     1.4  %    -1.1  %     1.3  %     0.9  %     1.9 %    -0.8  %            3.1  %

(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 October 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, caused us to approach the year with a conservative tone. (3) The weakness in 2012 was amplified in the first three quarters of the year by changes in foreign currencies (primarily Canada) relative to the U.S. dollar as indicated earlier.

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 %    9.7 %    14.9 %
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, third, and fourth 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 growth dropped to 10.5%, 6.1%, and 8.6% in April, May, and June, respectively, and then averaged 6.0% and 2.6% in the third and fourth quarters, respectively. 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% and 13.6% in the third and fourth quarters, respectively. The non-fastener business has demonstrated relative resilience in 2012, when compared to our fastener business and to the distribution industry in general, due to our strong FAST SolutionsSM (industrial vending) program; this is discussed in greater detail later in this document.
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 United States 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    51.7    49.5    50.7
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

For background to readers not familiar with the PMI index, it is a monthly indicator of the economic health of the manufacturing sector. Five major indicators that influence the PMI index are new orders, inventory levels, productions, supplier deliveries, and the employment environment. When a PMI of 50 or higher is reported, this indicates expansion in the manufacturing industry compared to the previous month. If the PMI is below 50, this represents a contraction in the manufacturing sector.

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:

        Q1        Q2       Q3       Q4     Annual
2012  17.1  %   12.7 %    8.2 %    4.2 %   10.3  %
2011  17.7  %   15.8 %   15.8 %   17.4 %   17.1  %

We believe the weakness in the economy in the fourth quarter of 2012, particularly in the non-residential construction market, was amplified by the political uncertainty in the United States.
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 to open approximately 65 to 80 stores in 2013, or approximately 2.5% to 3.0%). 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, and the results of this are reflected in our earlier discussion on sales growth at stores opened greater than five years. In the early 1990's, we began to expand our product lines, 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, lower our freight costs, and improve 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 year. We intend to continue our aggressive push with FAST SolutionsSM (industrial vending) and, to this end, have established an internal goal to sign 30,000 machines in 2013, or 2,500 per month rather than per quarter. This is an aggressive goal, but we believe we can hit this run rate during 2013. In addition, during 2012 we developed plans to (1) reinvigorate our fastener growth and to (2) improve the performance (i.e. sales growth) at under-performing locations. These plans centered on expanding our sales team for industrial production business, improving our delivery systems for other fastener business, and expanding the team that supports under-performing stores and districts.

The following table includes some statistics regarding our industrial vending business (note - we added the third category of information in this report to highlight the mix change in the machines deployed as our business expands beyond the flagship FAST 5000 machine):

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