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## 2004 

(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted) 

improvement and stabilization in the growth rates experienced. The choppy trend, which the Company experienced from July 2002 until June 2003, reflects the alternating strengthening and weakening in the industrial economy during that period, while the July 2003 to December 2004 improvement and stabilization reflects continued strengthening in the economy as it relates to the customers we sell to in North America and the impact of the CSP initiative (discussed below). 

Sales by Product Line— The following table indicates, by product line: (1) the products sold by the Company, (2) the year of introduction, and (3) the percentage of net sales. 

<img src='content_image/71225.jpg'>

P $_{1}$ PFastenal product line represents fasteners and miscellaneous supplies. 2 

P PThe Retail Packaged Product line related to the DIY Business acquisition, which was sold in October 2002. This product line has been merged into the Company’s other product lines. 

Threaded fasteners accounted for approximately 46%, 45%, and 46% of the Company’s net sales in 2004, 2003, and 2002, respectively. 

## Management’s Discussion & Analysis of Financial Condition & Results of Operations 

Gross Profit Margins— Gross profit as a percent of net sales was as follows: 

<img src='content_image/71227.jpg'>

The improvement in the gross profit margin in 2004 resulted from several factors. Rising steel prices had the largest impact on Fastenal’s gross profit margin. As a reseller of industrial products, primarily steel-based industrial products, Fastenal was forced to increase its selling prices. These increases resulted in approximately 3.0% to 4.0% of additional sales dollars in 2004. To date, the increases relate primarily to CSP (defined below) products, to changes in our wholesale (or list) pricing, and, to a lesser degree, to increases in the selling prices to our key account customers; the latter being less immediate. The short-term gross profit margin benefited from these changes as the increased cost of new inventory, still on the shelf, is included in ending inventory, and is relieved through cost of goods over the three to six month ‘turn’ period between purchase and sale of the product. Some of this short-term benefit has been eliminated during 2004; however, Fastenal’s ability to continue raising its prices in reaction to inbound product cost increases should allow us to retain some of the increased gross profit margin. The second factor impacting gross profit margins was the strength of our fastener products in the current economy. These products enjoy the highest gross profit margin percentage. The third factor was vendor incentive programs, including vendor freight allowances, early payment discounts, and rebates. The fourth factor was improvements in freight costs, primarily inbound. The fifth factor was the benefit of inventory depth discussed below. We expect the current economic activity to continue positively impacting our growth rates and the strength in our fastener business. This should allow us to maintain a portion of the improvements related to the first two factors, and should allow us to maintain most of the improvements related to vendor incentives, freight costs, and inventory depth. 

