Climb Global Solutions, Inc. (Wayside Technology Group, Inc. in this filing) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The filing reports the issuer as Wayside Technology Group, Inc. (NASDAQ: WSTG), with Climb Channel Solutions and TechXtend as its operating segments. Financial amounts below are in U.S. dollars; statements are unaudited.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $60.9m | $52.4m | $180.1m | $147.9m |
| Gross profit | $7.2m | $7.1m | $22.5m | $22.1m |
| Gross margin | 11.9% | 13.5% | 12.5% | 14.9% |
| Operating income | $0.8m | $2.0m | $2.5m | $5.9m |
| Net income | $0.5m | $1.4m | $1.9m | $4.8m |
| Diluted EPS | $0.13 | $0.32 | $0.44 | $1.06 |
| Adjusted EBITDA (non-GAAP) | $1.9m | $2.4m | $7.1m | $7.4m |
- Q3 sales rose 16%, while gross profit increased about 3%; lower gross margin and higher SG&A contributed to lower net income. Nine-month sales rose 22%, but net income fell about 59% year over year.
- At September 30, cash and equivalents were $40.3m, compared with $15.0m at year-end 2019. Current assets were $125.2m and current liabilities $91.9m. Total assets were $136.2m; stockholders’ equity was $42.2m.
- Operating cash flow was $32.5m for the first nine months, versus cash used of $2.4m in the prior-year period. The increase was primarily tied to working-capital movements, including approximately $30m of cash released by changed payment terms with a large customer; it should not be read as purely earnings-driven cash generation. Investing cash outflow was $1.2m and financing cash outflow was $5.9m, including dividends and share repurchases.
- No revolving-credit borrowings were outstanding. The amended facility provides up to $20m, matures June 30, 2023, and is secured by company assets. Lease liabilities totaled $2.4m. Management said cash and unused facility capacity should cover working-capital and cash needs for the next 12 months.
- Dividends paid were $0.17 per share in Q3 and $0.51 per share for the nine-month period, unchanged from comparable 2019 periods.
Material changes and business developments
- Climb Channel Solutions sales increased 17% in Q3 and 24% year to date, driven by Interwork and newer vendor lines. TechXtend sales increased 8% in Q3 but declined 1% year to date; its gross profit fell 11% year to date.
- The April 2020 Interwork acquisition contributed $2.6m of Q3 and $6.3m of nine-month revenue. The stated purchase price was approximately $3.6m, with a potential $0.8m earn-out. Purchase-price allocations remained preliminary.
- On November 6, 2020, after quarter-end, the company acquired CDF Group Limited for approximately £13.3m (about $17.4m), subject to adjustments. The filing does not provide post-acquisition results or detailed funding terms.
- In Q2, a large customer’s revised payment terms generated an approximately $30m reduction in receivables and increase in cash, while reducing sales and gross profit by about $0.4m and $0.7m, respectively, in Q3 and year to date. The related early-pay discounts contributed to higher customer discounts and rebates.
- The company settled the unsolicited-bid and shareholder dispute in April, dismissed its lawsuit with prejudice, and repurchased 261,631 shares for $3.5m. Net legal and advisory expense for the nine months was $1.8m; $0.1m of insurance proceeds was recognized in Q3.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management plans continued investment in business development, sales and marketing, and expected to complete integration of Interwork’s administrative functions in Q4 2020.
- Management reported no significant COVID-19 operating disruption through September 30 but said the pandemic’s future effects on demand, collections, supply chains, staffing, liquidity and results could not be predicted. Remote work measures were implemented.
- Profitability remains exposed to competitive pricing, product mix and historically declining gross margins; vendor rebates, customer discounts and payment timing also affect results. Two customers represented 34% of Q3 sales and 40% of nine-month sales; two vendors represented 33% of Q3 purchases and 29% year to date.
- SG&A rose 21% in Q3, including higher sales-related compensation, stock compensation and professional fees. Nine-month results also included $1.0m of acquisition costs and $1.8m of net legal and advisory costs. The effective tax rate was 31.1% year to date, partly affected by limits on deductibility of certain acquisition costs.
- The company recorded an estimate related to term-license renewals fulfilled before their commencement dates and corrected a similar prior-year estimate in the current period; management characterized the effect on previously reported periods as inconsequential, with no prior-period restatement.
- Management concluded disclosure controls were effective, but excluded Interwork from this quarter’s controls assessment while integration proceeds. The company reported compliance with credit-facility covenants.
Important facts for investors to verify
- Whether the large-customer payment-term change and resulting cash benefit are sustainable, and how it affects future discounts, margins and receivables.
- Customer and vendor concentration, including changes in major counterparties and their impact on collections, purchasing terms and rebates.
- Interwork integration, final purchase-price allocation and earn-out exposure, as well as CDF’s acquisition funding, adjustments and contribution to results.
- Gross-margin trends and reconciliation of non-GAAP adjusted EBITDA and adjusted gross billings to GAAP measures.
- COVID-19 developments, customer credit quality, and completion of Interwork’s integration into internal controls.