Net Sales
The table below sets forth net sales and daily sales for the periods ended March 31, and changes in such sales from the prior period to the more recent period:
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Three-month Period
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2020
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|
2019
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Net sales
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$
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1,367.0
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|
|
1,309.3
|
|
Percentage change
|
4.4
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%
|
|
10.4
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%
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Business days
|
64
|
|
|
63
|
|
Daily sales
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$
|
21.4
|
|
|
20.8
|
|
Percentage change
|
2.8
|
%
|
|
12.2
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%
|
Daily sales impact of currency fluctuations
|
-0.2
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%
|
|
-0.5
|
%
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Daily sales impact of acquisitions
|
0.0
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%
|
|
0.1
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%
|
|
|
|
|
Note – Daily sales are defined as the total net sales for the period divided by the number of business days (in the United States) in the period.
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The increase in net sales noted above for the first quarter of 2020 was driven by market share gains deriving from our success with our growth drivers, most notably contribution from industrial vending and Onsite locations, and from increases in certain products later in the quarter related to the coronavirus pandemic. A lesser contributor to our sales growth was higher product pricing to mitigate the effect of general inflation and tariffs in the marketplace. The first quarter of 2020 also benefited from an additional selling day and the absence of unfavorable weather in portions of North America that had a 65 to 85 basis point negative effect on the first quarter of 2019. These contributors were only partly offset by lower end market demand.
The trends in the first quarter of 2020 are best viewed through the cadence of each month in the quarter.
In January and February of 2020, underlying business conditions were sluggish. The Purchasing Managers Index ('PMI'), published by the Institute for Supply Chain Management, averaged 50.5 during this period, with readings above 50 being indicative of growing demand. This marginally above-50 reading had not yet translated into better demand, with U.S. Industrial Production, a key indicator for our sales trend, being down 0.4% during this period, when compared against the first quarter of 2019. Despite this, in January and February of 2020 we grew our daily sales by 4.1%. We believe this ability to outperform our market derives from two sources.
The first source is success within our growth initiatives. In the first quarter of 2020, the most impactful drivers included:
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•
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We signed 4,798 industrial vending devices during the first quarter of 2020. Our installed device count on March 31, 2020 was 92,124, an increase of 10.4% over March 31, 2019. Daily sales through our vending devices grew at a low double-digit pace in the first quarter of 2020 when compared to the same period of 2019 due to the increase in the installed base. These device counts do not include slightly more than 15,000 vending devices deployed as part of a lease locker program.
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•
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We signed 85 new Onsite locations during the first quarter of 2020. We had 1,179 active sites on March 31, 2020, which represented an increase of 24.8% from March 31, 2019. Daily sales through our Onsite locations, excluding sales transferred from branches to new Onsites, grew at a mid-single digit pace in the first quarter of 2020 over the first quarter of 2019. The contribution of newer active locations more than offset the impact of weaker demand on our more mature sites.
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•
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Daily sales from our national account customers grew 5.5% in the first quarter of 2020 over the first quarter of 2019.
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The second, and less meaningful contributor, was product pricing. Since 2017, we have taken steps to mitigate the impact of higher product costs owing to higher inflation and tariffs on ourselves and our customers, one of which was to adjust pricing where appropriate. Though these pressures have moderated as business activity has slowed and tariff-related actions have cooled, we did realize some incremental pricing in the first quarter of 2020 related to pricing actions taken in mid-2019. We estimate pricing contributed 30-60 basis points to growth in the first quarter of 2020, with January and February 2020 approximating those levels.
Conditions in March changed significantly. We believe the market share and pricing discussions above are relevant to the entire month, and that the macro discussion above is relevant to the first half of March. However, the second half of March saw levels of business activity weaken significantly in response to societal actions meant to address the coronavirus pandemic. While the company's facilities and in-market locations continue to operate, our branches did restrict public access and many of our Onsite
locations were closed or operating at a meaningfully diminished capacity (approximately 120 out of 1,136 North American Onsite locations were closed on March 31 because the customer was closed), negatively impacting sales at the end of the quarter. As a result, our daily sales growth slowed appreciably in March to 0.2%.
The shift in business conditions in March also generated more dramatic splits in our product and customer mix. For instance, in the first quarter of 2020 daily sales of fasteners declined 2.6% while daily sales of safety products and remaining non-fastener products grew 18.4% and 1.6%, respectively. In March specifically, daily sales of fasteners declined 10.1% while daily sales of safety products grew 31.0% and daily sales of remaining non-fastener products declined 2.5%. We saw similar patterns in our customer trends. In the first quarter of 2020 daily sales to manufacturing customers increased 3.0% and daily sales to non-residential construction customers declined 0.2%. In March specifically, daily sales to manufacturing and non-residential construction customers declined 1.1% and 7.8%, respectively. Daily sales to state and local government customers, which is not typically disclosed due to its relatively small size in our mix, grew 16.9% in the first quarter of 2020 but 31.1% in March, with sales to healthcare organizations more than doubling in March.
Sales by Product Line
The approximate mix of sales from fasteners, safety supplies, and all other product lines was as follows for the periods ended March 31:
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Three-month Period
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2020
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|
2019
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Fasteners
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32.9
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%
|
|
34.8
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%
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Safety supplies
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19.8
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%
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|
17.2
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%
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Other product lines
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47.3
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%
|
|
48.0
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%
|
|
100.0
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%
|
|
100.0
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%
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Gross Profit
In the first quarter of 2020, our gross profit, as a percentage of net sales, declined to 46.6%, or 110 basis points from 47.7% in the first quarter of 2019. We believe the decline in gross profit during this period is primarily due to two items. (1) From the first quarter of 2019 to the first quarter of 2020, our daily sales of fastener products decreased 2.6% while our daily sales of non-fastener products grew 6.0%. Fasteners are our largest product line and our highest gross profit margin product line due to the high transaction cost surrounding the sourcing and supply of the product for our customers. Over the same period, larger customers, for which national accounts are a good proxy and whose more focused buying patterns allow us to offer them better pricing, grew faster than smaller customers. Relatively slower growth in the first quarter of 2020 in our fastener product line (product mix) with relatively faster growth in sales to our largest customers (customer mix) pushed our gross profit margin lower. Declines in our gross profit percentage, such as we experienced in the first quarter of 2020, is an expected by-product of the success we are having growing sales through our vending and Onsite growth drivers. (2) Slower growth has resulted in our not leveraging near and intermediate term fixed costs, such as manufacturing, our captive fleet, or our international sourcing operation, as we have in past quarters, as well as period costs flowing through our operation. This is slightly exacerbated by more recent sources of growth, as orders related to critical supplies such as masks, gloves, and sanitizer, tend to be direct shipped rather than moved on our fleet or produced in our facilities.
The factors described above were relevant throughout the first quarter of 2020. As it relates to mix, in March specifically customer mix remained a factor. However, the widening growth differential between higher-margin fastener sales and lower-margin safety sales produced a greater product mix impact and increased the overall effect of mix on our gross profit percentage.
Operating and Administrative Expenses
Our operating and administrative expenses (including the gain on sales of property and equipment), as a percentage of net sales, improved to 26.7% in the first quarter of 2020 compared to 27.8% in the first quarter of 2019. The primary contributors to this improvement were relatively lower growth in employee-related, occupancy-related, and all other operating and administrative expenses.
The growth in employee-related, occupancy-related, and all other operating and administrative expenses (including the gain on sales of property and equipment) compared to the same periods in the preceding year, is outlined in the table below.
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Approximate Percentage of Total Operating and Administrative Expenses
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Three-month Period
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2020
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Employee-related expenses
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65% to 70%
|
0.2
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%
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Occupancy-related expenses
|
15% to 20%
|
1.8
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%
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All other operating and administrative expenses
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15% to 20%
|
0.8
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%
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Employee-related expenses include: (1) payroll (which includes cash compensation, stock option expense, and profit sharing), (2) health care, (3) personnel development, and (4) social taxes. Our employee-related expenses increased in the first quarter of 2020. This was primarily related to an increase in our full-time equivalent ('FTE') headcount and moderate increases in hourly base wages. This was mostly offset by lower incentive compensation due to lower growth in net sales and net earnings.
The table below summarizes our FTE headcount at the end of the periods presented and the percentage change compared to the end of the prior periods:
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Change Since:
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Change Since:
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Q1
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Q4
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Q4
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|
Q1
|
Q1
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|
2020
|
2019
|
2019
|
|
2019
|
2019
|
In-market locations
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12,334
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12,236
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0.8
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%
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12,482
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-1.2
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%
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Total selling (includes in-market locations)
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14,200
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|
14,060
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1.0
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%
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|
14,227
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-0.2
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%
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Distribution
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2,992
|
|
2,895
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|
3.4
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%
|
|
2,923
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|
2.4
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%
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Manufacturing
|
675
|
|
674
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0.1
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%
|
|
700
|
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-3.6
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%
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Administrative
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1,368
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|
1,339
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2.2
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%
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|
1,275
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7.3
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%
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Total
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19,235
|
|
18,968
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|
1.4
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%
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|
19,125
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|
0.6
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%
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Occupancy-related expenses include: (1) building rent, depreciation, and utility costs, (2) equipment related to our branches and distribution locations, and (3) industrial vending equipment (we view vending equipment, excluding leased locker equipment, to be an extension of our in-market operations and classify the depreciation and repair costs as occupancy expense). The increase in occupancy-related expenses in the first quarter of 2020, when compared to the first quarter of 2019, was primarily related to increases in equipment related to our distribution locations following investments in capacity in 2019 and increases in expenses related to industrial vending equipment. Facility costs were slightly down.
All other operating and administrative expenses include: (1) selling-related transportation, (2) information technology expenses, (3) net event costs, (4) general corporate expenses, including legal expenses, general insurance expenses, and travel and marketing expenses, and (5) the gain on sales of property and equipment. Combined, all other operating and administrative expenses increased in the first quarter of 2020 when compared to the first quarter of 2019 primarily due to higher spending on information technology and higher net event costs. This was partly offset by lower general corporate expenses, which includes the absence of a legal settlement that occurred in the first quarter of 2019.
Net Interest Expense
Our net interest expense was $2.1 in the first quarter of 2020 and $3.9 in the first quarter of 2019. This decrease was caused by lower average interest rates and a lower average debt balance during the period.
Income Taxes
We recorded income tax expense of $66.6 in the first quarter of 2020, or 24.7% of earnings before income taxes. Income tax expense was $63.4 in the first quarter of 2019, or 24.6% of earnings before income taxes. We continue to believe our ongoing tax rate, absent any discrete tax items, will be in the 24.5% to 25.0% range.
Net Earnings
Our net earnings during the first quarter of 2020 were $202.6, an increase of 4.4% when compared to the first quarter of 2019. Our diluted net earnings per share during the first quarter of 2020 were $0.35, an increase of 4.0% when compared to the first quarter of 2019.
Liquidity and Capital Resources
Cash flow activity was as follows for the periods ended March 31:
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|
|
|
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Three-month Period
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|
2020
|
|
2019
|
Net cash provided by operating activities
|
$
|
241.1
|
|
|
204.9
|
|
Percentage of net earnings
|
119.0
|
%
|
|
105.6
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%
|
Net cash used in investing activities
|
$
|
171.7
|
|
|
52.7
|
|
Percentage of net earnings
|
84.7
|
%
|
|
27.2
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%
|
Net cash used in financing activities
|
$
|
78.2
|
|
|
134.9
|
|
Percentage of net earnings
|
38.6
|
%
|
|
69.5
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%
|
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased in the first quarter of 2020 relative to the first quarter of 2019, primarily due to a reduced drag from net working capital investment relative to what was experienced in the first quarter of 2019 and, to a lesser degree, higher net income.
The dollar and percentage change in accounts receivable, net and inventories from March 31, 2019 to March 31, 2020 were as follows:
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|
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March 31
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Twelve-month Dollar Change
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Twelve-month Percentage Change
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|
|
2020
|
|
2019
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|
2020
|
|
2020
|
Accounts receivable, net
|
|
$
|
833.9
|
|
|
793.0
|
|
|
$
|
40.9
|
|
|
5.2
|
%
|
Inventories
|
|
1,345.5
|
|
|
1,293.9
|
|
|
51.6
|
|
|
4.0
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%
|
Total
|
|
$
|
2,179.4
|
|
|
2,086.9
|
|
|
$
|
92.5
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
Net sales in last two months
|
|
$
|
904.1
|
|
|
862.4
|
|
|
$
|
41.7
|
|
|
4.8
|
%
|
Note - Amounts may not foot due to rounding difference.
The growth in our net accounts receivable from March 31, 2019 to March 31, 2020 reflects not only our growth in sales but that our growth is being driven disproportionately by our national accounts program, where our customers tend to have longer payment terms than our business as a whole. This is being mitigated by weaker business activity, which reduces the amount of receivables.
The increase in inventory from March 31, 2019 to March 31, 2020 was primarily to support higher sales, largely reflecting large increases in the number of installed vending devices and active Onsite locations, to support higher levels of service, and from inflation and tariffs. The rate of growth continued to slow in the first quarter of 2020 based on slowing economic activity and internal efforts to reduce hub inventory. We intend to continue to invest in the inventory necessary to support our vending and Onsite initiatives.
Net Cash Used in Investing Activities
Net cash used in investing activities increased from the first quarter of 2019 to the first quarter of 2020. This was due to the acquisition of certain assets of Apex Industrial Technologies LLC late in the period. This was slightly offset by lower net capital expenditures.
Our capital spending will typically fall into five categories: (1) the addition of manufacturing and warehouse property and equipment, (2) the purchase of industrial vending technology, (3) the purchase of software and hardware for our information processing systems, (4) the addition of fleet vehicles, and (5) the purchase of signage, shelving, and other fixed assets related to branch and Onsite locations. Proceeds from the sales of property and equipment, typically for the planned disposition of pick-up trucks as well as distribution vehicles and trailers in the normal course of business, are netted against these purchases and additions. During the first quarter of 2020, our net capital expenditures were $46.7, which is a decrease of 11.6% from the first quarter of 2019. Of the factors described above, lower spending to develop and expand certain distribution center assets and, to a lesser degree, reduced fleet vehicle investment primarily explains the decline in our net capital expenditures in the first quarter of 2020.
Cash requirements for capital expenditures were satisfied from cash generated from operations, available cash and cash equivalents, our borrowing capacity, and the proceeds of disposals. We have reduced our expectations for net capital expenditures in 2020 to a range of $155.0 to $180.0, down from our previous range of $180.0 to $205.0 and a decrease from $239.8 in 2019. We had anticipated lower annual spending based on a reduction in projects that would develop and expand certain distribution center assets and, to a lesser degree, reduced fleet vehicle investment. The decline relative to our original projections for 2020 largely reflects a review and deferral of certain building projects in light of an increasingly uncertain business climate and lower vending spend due to a reduction in expected signings and, to a lesser degree, the impact on the cost of our vending equipment following the Apex asset purchase.
Net Cash Used in Financing Activities
Net cash used in financing activities in the first quarter of 2020 consisted of payments of dividends, purchases of our common stock, and payments against debt obligations, which were partially offset by proceeds from the exercise of stock options and proceeds from debt obligations. Net cash used in financing activities in the first quarter 2019 consisted of payments of dividends and payments against debt obligations, which were partially offset by proceeds from the exercise of stock options and proceeds from debt obligations. During the first quarter of 2020, we purchased 1,600,000 shares of our common stock at an average price of approximately $32.54 per share. During the first quarter of 2019, we did not purchase any shares of our common stock. We currently have authority to purchase up to 3,200,000 additional shares of our common stock. An overview of our dividends paid or declared in 2020 and 2019 is contained in Note 4 of the Notes to Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates – A discussion of our critical accounting policies and estimates is contained in our 2019 annual report on Form 10-K.
Recently Issued and Adopted Accounting Pronouncements – A description of recently adopted accounting pronouncements is contained in Note 1 of the Notes to Condensed Consolidated Financial Statements.
Certain Contractual Obligations – A discussion of the nature and amount of certain of our contractual obligations is contained in our 2019 annual report on Form 10-K. That portion of total debt outstanding under our Credit Facility and notes payable classified as long-term, and the maturity of that debt, is described earlier in Note 7 of the Notes to Condensed Consolidated Financial Statements.
Certain Risks and Uncertainties – Certain statements contained in this document do not relate strictly to historical or current facts. As such, they are considered 'forward-looking statements' that provide current expectations or forecasts of future events. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of terminology such as anticipate, believe, should, estimate, expect, intend, may, will, plan, goal, project, hope, trend, target, opportunity, and similar words or expressions, or by references to typical outcomes. Any statement that is not a purely historical fact, including estimates, projections, trends, and the outcome of events that have not yet occurred, is a forward-looking statement. Our forward-looking statements generally relate to our expectations regarding the business environment in which we operate, our projections of future performance, our perceived marketplace opportunities, our strategies, goals, mission and vision, and our expectations related to future capital expenditures, future tax rates, future inventory levels, Onsite and industrial vending signings, and the impact of price increases on overall sales growth or margin performance. You should understand that forward-looking statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. Factors that could cause our actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the impact of the COVID-19 pandemic, economic downturns, weakness in the manufacturing or commercial construction industries, competitive pressure on selling prices, changes in our current mix of products, customers, or geographic locations, changes in our average branch size, changes in our purchasing patterns, changes in customer needs, changes in fuel or commodity prices, inclement weather, changes in foreign currency exchange rates, difficulty in adapting our business model to different foreign business environments, failure to accurately predict the market potential of our business strategies, the introduction or expansion of new business strategies, weak acceptance or adoption of our vending or Onsite business models, increased competition in industrial vending or Onsite, difficulty in maintaining installation quality as our industrial vending business expands, the leasing to customers of a significant number of additional industrial vending devices, the failure to meet our goals and expectations regarding branch openings, branch closings, or expansion of our industrial vending or Onsite operations, changes in the implementation objectives of our business strategies, difficulty in hiring, relocating, training, or retaining qualified personnel, difficulty in controlling operating expenses, difficulty in collecting receivables or accurately predicting future inventory needs, dramatic changes in sales trends, changes in supplier production lead times, changes in our cash position or our need to make capital expenditures, credit market volatility, changes in tax law or the impact of any such changes on future tax rates, changes in tariffs or the impact of any such changes on our financial results, changes in the availability or price of commercial real estate, changes in the nature, price, or
availability of distribution, supply chain, or other technology (including software licensed from third parties) and services related to that technology, cyber-security incidents, potential liability and reputational damage that can arise if our products are defective, difficulties measuring the contribution of price increases on sales growth, and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission, including our most recent annual and quarterly reports. Each forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any such statement to reflect events or circumstances arising after such date.