Business context and reporting period
The filing is Wayside Technology Group, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed March 4, 2020. The company operates Lifeboat Distribution, which sells technology products through resellers, and TechXtend, a value-added reseller serving end users. The filing also provides unaudited fourth-quarter results. The issuer named in the filing is Wayside Technology Group, Inc.
Financial performance and liquidity
Amounts below are in millions of dollars unless stated otherwise.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $208.8 | $181.4 | +15% |
| Gross profit | $30.0 | $26.9 | +11% |
| Operating income | $8.5 | $4.2 | More than doubled |
| Net income | $6.8 | $3.5 | +92% |
| Diluted EPS | $1.51 | $0.78 | +94% |
| Adjusted EBITDA (non-GAAP) | $10.5 | $9.2 | +14% |
| Operating cash flow | $3.2 | $13.9 | Down $10.7 |
Gross margin on net sales was 14.4%, versus 14.8% in 2018. Gross profit as a percentage of adjusted gross billings (non-GAAP) declined to 5.0% from 5.3%; adjusted gross billings rose 18% to $601.0 million. Adjusted EBITDA as a percentage of gross profit increased to 34.8% from 34.1%.
Lifeboat sales grew 18% to $193.6 million, while TechXtend sales fell 15% to $15.2 million. Lifeboat gross profit rose to $26.8 million; TechXtend gross profit declined to $3.2 million. Fourth-quarter 2019 sales were $60.9 million, gross profit $7.9 million, and net income $2.0 million; fourth-quarter 2018 figures were $49.1 million, $7.2 million, and $1.7 million, respectively.
Cash and cash equivalents were $15.0 million at year-end, and working capital was $42.8 million. Current assets were $121.5 million and current liabilities $78.7 million. The company had no borrowings under its $20 million revolving facility at year-end; it was scheduled to mature August 31, 2020. Lease liabilities totaled $2.6 million, including $0.4 million current. The company paid $3.1 million in dividends in 2019 and declared $0.68 per share, as in 2018.
Operating cash flow fell from 2018, chiefly as growth in accounts receivable absorbed cash; management cited increased sales to a large customer with longer-than-average payment terms. Year-end accounts receivable, net, rose to $101.0 million from $81.4 million. The company adopted lease accounting Topic 842 in 2019, recognizing approximately $3.0 million of operating lease liabilities at adoption and corresponding right-of-use assets.
Material changes versus the prior comparable period
- Sales and gross profit increased, primarily reflecting stronger Lifeboat sales penetration and contributions from new product lines; TechXtend contracted.
- Net income benefited from separation costs falling to $0.1 million from $2.4 million. Excluding separation costs, net income (non-GAAP) was $6.9 million versus $5.5 million.
- SG&A increased 5% to $21.4 million, but declined as a share of sales to 10.3%; management attributed the increase mainly to employee-related costs.
- Operating cash flow decreased substantially, despite higher earnings, because of working-capital demands, particularly receivables.
- Vendor rebates and discounts increased to $3.3 million from $2.4 million. Hardware and peripherals were 6% of adjusted gross billings, down from 8%.
Outlook, risks, contingencies and unusual items
The filing provides no quantified financial guidance. Management anticipated continued investment in information technology and marketing and said SG&A as a percentage of sales may vary with sales volume and growth initiatives. It also expected continued price competition and margin pressure.
Key risks include reliance on major customers and vendors, direct sales by vendors and changing software distribution methods, pricing competition, customer credit and collection exposure, and dependence on IT spending. CDW and SHI represented 26% and 16% of 2019 sales, respectively; the five largest customers represented 56%. Sophos and SolarWinds accounted for 22% and 17% of purchases. The company also identified cybersecurity, foreign exchange, financing, and economic and political uncertainty as risks; it noted the coronavirus outbreak among potential sources of uncertainty.
A shareholder activism and litigation matter was ongoing after year-end. A former CEO nominated four director candidates and had granted an irrevocable proxy to an investor group; the group’s latest acquisition proposal expired in December 2019. In February 2020, the company sued the former CEO and the investor group, seeking damages and other relief. The matter was in its early stages, its outcome and costs could not be determined, and no provision was recorded.
The company reported effective disclosure controls and internal control over financial reporting as of December 31, 2019. Its independent auditor issued an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
Most important facts for investors to verify
- Whether the sharp increase in accounts receivable is collected on schedule, particularly balances due from major customers with extended terms.
- Whether the growth in Lifeboat sales can continue while gross margin remains under pressure and vendor rebates vary.
- The status and outcome of the shareholder activism, acquisition-related proposals, and litigation, including any resulting costs or governance changes.
- The renewal or replacement terms for the revolving credit facility due to mature August 31, 2020, and the company’s capacity to fund working capital and dividends.
- The issuer identity and reporting-period mapping: this filing names Wayside Technology Group, Inc. and covers fiscal 2019, rather than identifying itself as Climb Global Solutions, Inc.