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 condensed consolidated financial statements. Dollar amounts are stated in millions except for share and per share amounts and where otherwise noted. Share and per share information in this 10-Q has been adjusted to reflect the two-for-one stock split effective at the close of business onMay 22, 2019 . Throughout this document, percentage and dollar change calculations, which are based on non-rounded dollar values, may not be able to be recalculated using the dollar values in this document due to the rounding of those dollar values. Business Fastenal is a North American leader in the wholesale distribution of industrial and construction supplies. We distribute these supplies through a network of over 3,200 in-market locations. Most of our customers are in the manufacturing and non-residential construction markets. The manufacturing market includes producers who incorporate our products into final goods, called original equipment manufacturing (OEM), and/or utilize our supplies in the maintenance, repair, and operation (MRO) of their facilities and equipment. The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors. Other users of our products include farmers, truckers, railroads, oil exploration, production, and refinement companies, mining companies, federal, state, and local governmental entities, schools, and certain retail trades. Geographically, our branches, Onsite locations, and customers are primarily located inNorth America (the United States ,Canada , andMexico ), though our presence outside ofNorth America continues to grow as well. Our motto is Growth through Customer Service®. We are a growth-centric organization focused on identifying 'drivers' that allow us to get closer to our customers and gain market share in what we believe remains a fragmented industrial distribution market. Our growth drivers have evolved and changed, and can be expected to continue to evolve and change, over time. Impact of COVID-19 on Our Business Through the second quarter of 2020, the COVID-19 pandemic has had significant impacts on our business. We continued to operate with some modifications because, based on the various published standards to date, the work our employees are performing, particularly with respect to supplying products required by our safety business, is critical, essential, and life-sustaining. We took actions intended to protect our employees and our customers that adversely affected our results. First, we restricted public access to our branches, which has resulted in lower retail sales at those locations through the second quarter of 2020. Many of our locations have re-opened to the public, but a meaningful number remain restricted. Second, many of our customers either closed their locations or operated at significantly diminished capacity as a result of local and national actions taken, such as stay-at-home mandates, that reduced business activity and negatively impacted sales through the second quarter of 2020. Third, social actions taken to mitigate the effects of the pandemic produced significant demand for personal protection equipment ('PPE') and sanitation products, generating significant sales of such products not only to certain traditional customers but also to state and local government entities as well as front line responders. The favorable impact of this third variable on our results for the first six months of 2020 more than offset the adverse impact of the first two variables, which resulted in weaker sales through our branch and Onsite network to our traditional manufacturing and construction customers. At the end of the second quarter of 2020, many of the markets in which we operate had begun to ease restrictions that were in place earlier in the period. This is having two effects. The first is to improve the outlook of the manufacturing and construction customers that support our traditional branch and Onsite business. The second is to moderate the level of demand for PPE and sanitation products that we experienced at the onset of the pandemic. However, as of the date of this filing, viral infections have begun to increase again resulting in resumption of restrictions in certain markets in which we operate. As a result, there remains significant uncertainty concerning the magnitude of the impact and duration of the COVID-19 pandemic. Factors deriving from the COVID-19 response that have or may negatively impact sales and gross margin in the future include, but are not limited to: limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; and limitations on the ability of our customers to pay us on a timely basis. With respect to liquidity, we continue to evaluate and limit costs and spending across our organization. This includes reduced headcount, a reduction in discretionary spending, and lower anticipated spending on capital investment projects. As of the end of the second quarter of 2020, we have substantially all of our$700M bank revolver available for use in the event that the need arises. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and shareholders. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources, we believe that it is 13
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important to share where our company stands today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 progresses. Executive Overview Net sales increased$140.6 , or 10.3%, in the second quarter of 2020 relative to the second quarter of 2019. Our gross profit as a percentage of net sales declined to 44.5% in the second quarter of 2020 from 46.9% in the second quarter of 2019. Our operating income, as a percentage of net sales, increased to 20.9% in the second quarter of 2020 from 20.1% in the second quarter of 2019. Our net earnings during the second quarter of 2020 were$238.9 , an increase of 16.7% when compared to the second quarter of 2019. Our diluted net earnings per share were$0.42 during the second quarter of 2020 compared to$0.36 during the second quarter of 2019, an increase of 16.7%. Our results in the second quarter of 2020 were significantly affected by the impacts of the COVID-19 pandemic throughout the period. This had the effect of both drastically increasing our sales of PPE and sanitation products to help governments, health care providers, and critical infrastructure entities manage the pandemic, while also causing significant declines in demand among our traditional manufacturing and construction customers as the economy sharply slowed. In this period, we continued to focus on our growth drivers, though signings of Onsite customer locations (defined as dedicated sales and service provided from within, or in close proximity to, the customer's facility) and industrial vending devices slowed as our customer's energy shifted to short-term management over long-term planning. However, this had to be balanced against some additional priorities that are always important, but never more so than in the environment that existed in the second quarter of 2020. These included a focus on employee and customer safety, supporting customers that were most directly involved in pandemic mitigation, and using our liquidity to sustain a supply chain of critical products for our business, our customers, and society. The table below summarizes our total employee headcount, our investments in in-market locations (defined as the sum of the total number of public branch locations and the total number of active Onsite locations), and industrial vending devices at the end of the periods presented and the percentage change compared to the end of the prior periods. Change Change Since: Change Since: Since: Q2 Q1 Q1 Q2 Q2 2020 2020 2020 Q4 2019 Q4 2019 2019 2019 In-market locations - absolute employee headcount 12,982 14,001 -7.3 % 13,977 -7.1 % 14,372 -9.7 % Total absolute employee headcount 20,667 22,131 -6.6 % 21,948
-5.8 % 22,232 -7.0 %
Number of public branch locations 2,060 2,091 -1.5 % 2,114
-2.6 % 2,165 -4.8 % Number of active Onsite locations 1,212 1,179 2.8 % 1,114 8.8 % 1,026 18.1 % Number of in-market locations 3,272 3,270 0.1 % 3,228 1.4 % 3,191 2.5 % Industrial vending devices (installed count) (1) 92,615 92,124 0.5 % 89,937 3.0 % 85,871 7.9 %Ratio of industrial vending devices to in-market locations 28:1 28:1 28:1 27:1 (1) This number primarily represents devices which principally dispense product and produce product revenues, and excludes slightly more than 15,000 devices that are part of our locker lease program where the devices are principally used for the check-in/check-out of equipment. During the last twelve months, we reduced our absolute employee headcount by 1,390 people in our in-market locations and 1,565 people in total. The reduction in our absolute employee headcount in our in-market and distribution center locations reflects efforts to control expenses in response to weaker demand that has resulted from actions on the part of local governments and our core manufacturing and construction customers to address COVID-19 related risks. The decrease in our total absolute employee count is mostly from personnel reductions in our in-market locations, distribution centers, and manufacturing operations, and was only partly offset by additions in non-branch selling and support roles. The latter reflects the addition of certain employees from our acquisition of Apex as well as roles to support customer acquisition and implementation, particularly as it relates to our growth drivers and to support general corporate functions. The relatively greater declines we experienced in our FTE headcount versus our absolute employee headcount reflects the sharp curtailment of hours worked by part-time employees, which declined 23.2% in the second quarter of 2020 versus the second quarter of 2019, relative to our headcount reductions of part-time (down 14.5%) and full-time (down 3.8%) employees. We opened four branches in the second quarter of 2020 and closed 35 branches, net of conversions. We activated 55 Onsite locations in the second quarter of 2020 and closed 22, net of conversions. The number of closings reflects both normal churn in our business, whether due to exiting customer relationships, the shutting or relocation of a customer facility, or a customer decision, as well as our ongoing review of underperforming locations. Our in-market network forms the foundation of our business strategy, and we 14
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will continue to open or close locations as is deemed necessary to sustain and improve our network, support our growth drivers, and manage our operating expenses. Results of Operations
The following sets forth condensed consolidated statement of earnings
information (as a percentage of net sales) for the periods ended
Six-month Period Three-month Period 2020 2019 2020 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 45.5 % 47.3 % 44.5 % 46.9 % Operating and administrative expenses 25.1 % 27.3 % 23.5 % 26.8 % (Gain) loss on sale of property and equipment 0.0 % 0.0 % 0.0 % 0.0 % Operating income 20.4 % 20.0 % 20.9 % 20.1 % Net interest expense -0.2 % -0.3 % -0.2 % -0.3 % Earnings before income taxes 20.3 % 19.8 % 20.8 % 19.8 % Note - Amounts may not foot due to rounding difference. Net Sales The table below sets forth net sales and daily sales for the periods endedJune 30 , and changes in such sales from the prior period to the more recent period: Six-month Period Three-month Period 2020 2019 2020 2019 Net sales$ 2,876.0 2,677.7$ 1,509.0 1,368.4 Percentage change 7.4 % 9.1 % 10.3 % 7.9 % Business days 128 127 64 64 Daily sales$ 22.5 21.1 $ 23.6 21.4 Percentage change 6.6 % 10.0 % 10.3 % 7.9 % Daily sales impact of currency fluctuations -0.3 % -0.5 % -0.4 % -0.4 % Daily sales impact of acquisitions 0.0 % 0.1 % 0.0 % 0.1 %
Note - Daily sales are defined as the total net sales for the period divided by the number of business days (in
In the first six months of 2020 our net sales of$2,876.0 increased$198.3 , or 7.4%. Adjusted for an extra selling day in the first quarter of 2020, our daily sales rate increased 6.6%. We believe this increase is entirely due to "surge"-like orders of personal protective equipment ('PPE') and sanitation products to global governments and businesses as they addressed issues related to the COVID-19 pandemic. In January and February of 2020, underlying business conditions were sluggish. The Purchasing Managers Index ('PMI'), published by theInstitute for Supply Chain Management , averaged 50.5 during this period, just barely above a reading of 50 that is indicative of growing demand. However, we were able to grow our daily sales by 4.1% over this period, due largely to unit sales from our vending and Onsite growth initiatives and, to a lesser extent, product pricing as a result of pricing actions taken in mid-2019. These conditions carried into the first part of March. Conditions began to change in the second half of March, however, as global governments and businesses began to respond more aggressively to the COVID-19 pandemic, resulting in weaker business activity. This response came in two forms. First, underlying business conditions turned sharply negative as stay-at-home orders in many of the geographic markets in which we operate caused businesses to close or operate at significantly reduced levels. This was captured by the PMI, which averaged 45.7 from April to June, with readings below 50 being indicative of declining demand. During this period of time, sales through our branches to our traditional manufacturing, construction, and walk-in customers fell, more than offsetting the unit gains we had experienced in January, February, and early March. We did experience some improvement in business conditions through the quarter, however, which is best illustrated by our daily sales rate trend of fasteners, which is our most cyclical product category and which was unaffected by surge activity. InApril 2020 , fastener daily sales were down 22.5%. In May, the rate of decline moderated to down 15.3% and in June, it moderated again to down 11.4%. However, the activity levels experienced in June remain below those that existed in the first quarter of 2020. Second, we saw a surge in PPE and sanitation orders as governments, front line responders, and critical 15
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infrastructure customers sought to protect their employees as they worked to mitigate the effects of the pandemic. This resulted in a meaningful increase in our sales of PPE and sanitation products that began late in March, peaked in April and May, and was still meaningful in June. It is difficult to know precisely what our surge sales through this period were. However, we estimate that excluding these sales our net and daily sales in the first six months of 2020 would have each declined between 5% and 8%. Product pricing was a stable, albeit minor, contributor throughout the period. We estimate pricing contributed 30 to 80 basis points to growth in the first six months and second quarter of 2020, and 70 to 120 basis points in the first six months and second quarter of 2019. Pandemic-related events also produced significant shifts in the mix of our business through the first six months of 2020. From a product standpoint, fastener daily sales declined 9.6% in the first six months of 2020 from the first six months of 2019 and accounted for 29.3% of total sales, down from 34.7% of sales in the prior year. Fasteners tend to be our highest margin product line. In contrast, safety daily sales, which includes PPE, grew 68.4% in the first six months of 2020 from the first six months of 2019 and accounted for 27.3% of total sales, up from 17.4% of sales in the prior year. Daily sales of other products, which includes sanitizer, declined 3.0% in the first six months of 2020 from the first six months of 2019 and accounted for 43.4% of total sales, down from 47.9% of sales in the prior year. Safety and other products tend to have gross margins below our company average. From a customer standpoint, daily sales of our manufacturing customers declined 3.2% in the first six months of 2020 from the first six months of 2019. Daily sales of our non-residential construction customers declined 5.4% in the first six months of 2020 from the first six months of 2019. These reflected the challenging underlying business environment through the period. In contrast, sales to government customers, which includes health care providers, increased 144.3% and was 8.4% of our sales mix in the first six months of 2020, up from 3.7% of sales in the first six months of 2019. Pandemic-related events also reduced activity around our growth drivers, as customers shifted their energies to managing short term disruption rather than long-term strategic planning. For instance: • We signed 8,281 industrial vending devices during the first six months of 2020 and 3,483 industrial vending devices during the second quarter of 2020. On a business day basis, we signed 75 in the first quarter of 2020
and 54 in the second quarter of 2020, including 69 in June. Our installed
device count onJune 30, 2020 was 92,615, an increase of 7.9% overJune 30, 2019 . Daily sales through our vending devices declined at a low single-digit pace in the first six months of 2020 and declined at a low double-digit pace in the second quarter of 2020 as lower revenue per
machine more than offset 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.
• We signed 125 new Onsite locations during the first six months of 2020.
This included 85 signings in the first quarter of 2020 and 40 in the
second quarter of 2020, including 20 in June. We had 1,212 active sites on
Daily sales through our Onsite locations, excluding sales transferred from
branches to new Onsites, declined at a low single-digit pace in the first
six months of 2020 and declined at a high single-digit pace in the second
quarter of 2020. Weaker activity, including the closure of many locations
from March through May, resulted in weaker sales at more mature sites which more than offset the contribution of newer active locations. We removed our guidance for 2020 signings of vending devices and Onsite locations in April due to the uncertainty of the business environment. Signings for both of our growth drivers were significantly below pre-pandemic expecations in April, but improved in May and again in June. However, they have not returned to the level we projected pre-pandemic, and while we expect that to happen, the timing is still uncertain. As a result, we are not reestablishing signings guidance at this time. In the second quarter of 2020, our net sales of$1,509.0 increased$140.6 , or 10.3%. We believe this increase is entirely due to "surge"-like orders of PPE to global governments and businesses as they addressed issues related to the COVID-19 pandemic, which we described in detail in the paragraphs above. We estimate that excluding these sales our net sales in the second quarter of 2020 would have declined between 14% and 17%. 16
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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
Six-month Period Three-month Period 2020 2019 2020 2019 Fasteners 29.3 % 34.7 % 26.0 % 34.5 % Safety supplies 27.3 % 17.4 % 34.0 % 17.5 % Other product lines 43.4 % 47.9 % 40.0 % 48.0 % 100.0 % 100.0 % 100.0 % 100.0 % Gross Profit In the first six months of 2020, our gross profit, as a percentage of net sales, declined to 45.5%, or 180 basis points from 47.3% in the first six months of 2019. We believe the decline in gross profit during this period is primarily due to three items. (1) From the first six months of 2019 to the first six months of 2020, our daily sales of fastener products decreased 9.6% while our daily sales of non-fastener products grew 16.0%. Fasteners are our highest gross profit margin product line due to the high transaction cost surrounding the sourcing and supply of the product for our customers, and relative weakness from this line can push our gross profit margin lower. This dynamic was present throughout the second quarter of 2020, but was partly offset by favorable customer mix due to the relative weakness of our lower-margin Onsite business. (2) Our product margins for safety and, to a lesser degree, other products declined. We believe this is mostly due to our purchasing large volumes of pandemic-related products, such as PPE and sanitizer, from non-traditional sources and non-optimized supply chains. This was a by-product of the conscious decision by the organization to prioritize speed of product availability over profit maximization so as to promote a faster social and economic recovery. (3) Organizational factors. We were not able to leverage near- and intermediate-term fixed costs, such as our manufacturing operations and captive fleet, as well as period costs flowing through our operation due to slower growth in the period. Rebates also represented a drag to gross profit in the period. These factors were only slightly offset by lower fuel costs and fleet expense management efforts. In the second quarter of 2020, our gross profit, as a percentage of net sales, declined to 44.5% or 240 basis points from 46.9% in the second quarter of 2019. The decline is primarily attributable to the same factors that influenced the first six months, as described in preceding paragraph. Operating and Administrative Expenses Our operating and administrative expenses (including the (gain) loss on sales of property and equipment), as a percentage of net sales, improved to 25.1% in the first six months of 2020 compared to 27.3% in the first six months of 2019, and improved to 23.6% in the second quarter of 2020 compared to 26.8% in the second quarter of 2019. We achieved leverage in both periods by generating relatively lower growth in employee-related, occupancy-related, and all other operating and administrative costs than we experienced in sales. The growth or contraction in employee-related, occupancy-related, and all other operating and administrative expenses (including the (gain) loss on sales of property and equipment) compared to the same periods in the preceding year, is outlined in the table below. Approximate Percentage of Total Operating Six-month Period Three-month Period and Administrative Expenses 2020 2020 Employee-related expenses 65% to 70% -1.9 % -3.9 % Occupancy-related expenses 15% to 20% 0.5 % -0.9 % All other operating and administrative expenses 10% to 15% 0.2 %
-0.4 %
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. In the first six months of 2020, our employee-related expenses decreased when compared to the first six months of 2019 as a result of slightly lower average FTE during the period, reduced incentive pay due mostly to slower sales and earnings growth especially in the first quarter of 2020, and reduced spending on theFastenal School of Business as pandemic-related policies eliminated in-person training programs. In the second quarter of 2020, our employee-related expenses decreased when compared to the second quarter of 2019, as a result primarily of lower average FTE during the period, which was partially offset by an increase in employer profit sharing expense. 17
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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:
Change Since: Change Since: Change Since: Q2 Q1 Q1 Q4 Q4 Q2 Q2 2020 2020 2020 2019 2019 2019 2019 In-market locations 11,310 12,334 -8.3 % 12,236 -7.6 % 12,903 -12.3 % Total selling (includes in-market locations) 13,186 14,200 -7.1 % 14,060 -6.2 % 14,687 -10.2 % Distribution 2,615 2,992 -12.6 % 2,895 -9.7 % 2,954 -11.5 % Manufacturing 625 675 -7.4 % 674 -7.3 % 704 -11.2 % Administrative 1,388 1,368 1.5 % 1,339 3.7 % 1,315 5.6 % Total 17,814 19,235 -7.4 % 18,968 -6.1 % 19,660 -9.4 % 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). In the first six months of 2020, our occupancy-related expenses increased when compared to the first six months of 2019, primarily related to increases in equipment costs stemming from our distribution locations following investments in capacity in 2019. In the second quarter of 2020, our occupancy-related costs decreased slightly. The major components of our occupancy expense - our distribution centers, branches, and vending device costs - all had individually very small changes that collectively produced the slight decline in occupancy expenses during the quarter. 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) gains or losses on sales of property and equipment. Combined, all other operating and administrative expenses increased slightly in the first six months of 2020 when compared to the first six months of 2019. An increase in spending for information technology, higher net event costs, and reduced gains from asset disposals was only partly offset by reduced costs resulting from lower fuel expenses in our non-selling transportation operation, lower general corporate expenses, such as reduced travel, and generally tight cost control. Combined, all other operating and administrative expenses declined in the second quarter of 2020 when compared to the second quarter of 2019. Lower costs for selling-related transportation due to lower fuel prices and lower expenses due to minimal travel and tight cost control more than offset higher spending on information technology and losses from asset sales. Net Interest Expense Our net interest expense was$4.4 in the first six months of 2020 and$2.4 in the second quarter of 2020, compared to$7.5 in the first six months of 2019 and$3.6 in the second quarter of 2019. The decrease over the six-month period was caused by lower average interest rates and a lower average debt balance during the period, while the decrease over the three-month period was driven by lower average interest rates, only partly offset by a higher average debt level through the period. Income Taxes We recorded income tax expense of$141.4 in the first six months of 2020, or 24.3% of earnings before income taxes, and$74.8 in the second quarter of 2020, or 23.8% of earnings before income taxes. We recorded income tax expense of$130.2 in the first six months of 2019, or 24.6% of earnings before income taxes, and$66.8 in the second 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 six months of 2020 were$441.5 , an increase of 10.7% when compared to the first six months of 2019. Our net earnings during the second quarter of 2020 were$238.9 , an increase of 16.7% when compared to the second quarter of 2019. Our diluted net earnings per share during the first six months of 2020 were$0.77 , an increase of 10.5% when compared to the first six months of 2019. Our diluted net earnings per share during the second quarter of 2019 were$0.42 , an increase of 16.7% when compared to the second quarter of 2019. 18
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Liquidity and Capital Resources Cash flow activity was as follows for the periods endedJune 30 : Six-month Period 2020 2019
Net cash provided by operating activities
111.4 % 83.5 %
Net cash used in investing activities
47.3 % 30.0 %
Net cash used in financing activities
57.2 % 51.7 % Net Cash Provided by Operating Activities Net cash provided by operating activities increased in the first six months of 2020 relative to the first six months of 2019. The most significant factor in this increase was the deferral of$111.5 of income and payroll tax as allowed under the CARES Act, which was signed into law inMarch 2020 to help businesses navigate COVID-related challenges. Of the$111.5 , approximately$103.9 will be paid in the third quarter of 2020 with the remainder being paid in the third quarter of 2021. Most of the remainder of the increase in net cash provided by operating activities is due to higher net income. The dollar and percentage change in accounts receivable, net, inventories, and accounts payable fromJune 30, 2019 toJune 30, 2020 were as follows: Twelve-month
Twelve-month Dollar Percentage
June 30 Change Change 2020 2019 2020 2020 Accounts receivable, net$ 881.5 819.8$ 61.7 7.5 % Inventories 1,401.5 1,345.7 55.8 4.1 % Trade working capital$ 2,283.0 2,165.6$ 117.4 5.4 % Accounts payable$ 194.1 203.8$ (9.7 ) -4.8 % Trade working capital, net$ 2,088.9 1,961.8$ 127.1 6.5 % Net sales in last two months$ 1,017.6 907.7$ 109.9 12.1 % Note - Amounts may not foot due to rounding difference. The growth in our net accounts receivable fromJune 30, 2019 toJune 30, 2020 reflects the growth in our sales. The increase in inventory fromJune 30, 2019 toJune 30, 2020 was primarily due to our increasing inventory of PPE products in anticipation of greater need as the economy re-opened as well as to support the increase in our number of installed vending devices and active Onsite locations. We also did not experience the inventory burn we might have expected given current economic weakness due to the large number of customers that were either closed or operating at very low levels of utilization for part of the second quarter of 2020. This was particularly evident in our fastener products. The decrease in accounts payable fromJune 30, 2019 toJune 30, 2020 was primarily due to the effect of lower customer demand on our purchasing activity, as a significant proportion of the PPE and sanitizer surge volumes in the period that drove our sales increase required immediate payment, and so did not produce trade payables on our balance sheet.Net Cash Used in Investing Activities Net cash used in investing activities increased from the first six months of 2019 to the first six months of 2020. This was due to the acquisition of certain assets ofApex Industrial Technologies LLC during the first quarter of 2020. 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 19
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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 six months of 2020, our net capital expenditures were$84.9 , which is a decrease of 29.0% from the first six months 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 six months 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. Our expectations for net capital spending in 2020 is unchanged in a range of$155.0 to$180.0 , a decrease from$239.8 in 2019. This decline reflects anticipated reductions in projects that would develop and expand certain distribution center assets, reduced fleet vehicle investment, 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 six months of 2020 consisted of payments of dividends and purchases of our common stock, which were partially offset by net proceeds from debt obligations and from the exercise of stock options. Net cash used in financing activities in the first six months of 2019 consisted of payments of dividends, which were partially offset by proceeds from the exercise of stock options. During the first six months 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 six months 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 and surge sales 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 or the impact of surge sales on our overall net sales, 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 20
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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 theSecurities 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. 21
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