Business context and reporting period
This Form 10-Q is for the quarter ended September 30, 2015, and was filed by Wayside Technology Group, Inc. (the registrant named in the filing). The company distributes technical software through Lifeboat Distribution and resells software, hardware, and services through TechXtend. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and liquidity
- Third quarter: Revenue was $97.7 million, up 8% from $90.5 million. Gross profit was $6.9 million, up 11%; operating income was $2.3 million, up from $1.9 million; net income was $1.6 million, up from $1.4 million. Diluted EPS was $0.33 versus $0.29.
- First nine months: Revenue was $282.3 million, up 14%; gross profit was $19.7 million, up 10%; operating income was $6.1 million, up from $5.6 million; net income was $4.2 million, up from $3.9 million. Diluted EPS was $0.90 versus $0.83.
- Margins and expenses: Gross margin was 7.0% in Q3 versus 6.8% a year earlier, and 7.0% for nine months versus 7.2%. SG&A was $4.6 million in Q3 and $13.5 million for nine months; it represented 4.7% and 4.8% of revenue, respectively.
- Cash flow: Nine-month operating cash flow was $2.7 million, compared with cash used of $3.3 million in 2014. Investing used $0.2 million; financing used $5.6 million, including $2.4 million of dividends and $3.9 million of share repurchases. Cash declined $3.5 million from year-end 2014 to $19.6 million.
- Balance sheet and debt: At September 30, cash was $19.6 million, current assets were $79.8 million, and current liabilities were $48.5 million. The company had no borrowings under its $10 million revolving credit facility. The facility matures January 4, 2016; reported operating lease obligations totaled $0.4 million.
- Shareholder returns: Dividends paid were $0.17 per share in Q3 and $0.51 per share for nine months. The company repurchased $3.9 million of treasury stock during the first nine months.
Material changes versus comparable periods
- Lifeboat revenue increased 11% in Q3 and 21% for nine months, which management attributed mainly to new product lines and stronger account penetration. TechXtend revenue declined 12% in Q3 and 20% for nine months, primarily due to fewer extended-payment-term transactions; nine-month weakness also reflected fewer large transactions.
- For nine months, Lifeboat gross profit rose 18%, while TechXtend gross profit fell 13%. Q3 gross margin improved, but the nine-month margin declined year over year.
- Accounts receivable and accounts payable both decreased from December 31, 2014. Management attributed these working-capital movements mainly to lower sales volume in Q3 2015 compared with Q4 2014.
- Foreign currency translation reduced comprehensive income by $0.9 million for nine months, versus a $0.4 million loss in the comparable 2014 period.
Outlook, risks, contingencies, and unusual items
- No quantitative revenue or earnings guidance was provided. Management expected continued investment in Lifeboat and said SG&A as a share of revenue could vary with sales, headcount, and marketing.
- Management said competitive pricing was affecting the market and expected margins, discounts, and rebates to remain affected. Financing larger transactions on extended terms could also pressure gross margins.
- Management believed cash and available credit would fund working-capital and cash needs for at least 12 months. It was evaluating whether to renew, renegotiate, or replace the credit facility at maturity and cautioned that acceptable terms were not assured.
- Key exposures include dependence on vendor relationships and incentives, concentration in one vendor (24.3% of nine-month purchases), customer concentration (two customers generated 18.8% and 17.9% of nine-month sales), competition, product mix, customer credit risk, and Canadian-dollar exchange-rate movements. Canadian operations generated 5.9% of nine-month sales.
- Federal tax returns for 2013–2014 and New Jersey and Canadian returns for 2012–2014 remained open to examination. The IRS examination of 2011–2012 concluded with no changes. The filing reports no off-balance-sheet arrangements and no borrowings at quarter-end; it does not identify a specific material litigation contingency.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Lifeboat growth and new product lines can offset continuing weakness in TechXtend and preserve margins.
- Whether vendor rebates, pricing pressure, and extended-payment-term sales materially affect future profitability and cash conversion.
- How the company will address the January 2016 credit-facility maturity and whether replacement or renewed terms are available.
- The continuing effects of share repurchases and dividends on cash, alongside working-capital requirements and customer/vendor concentration.
- Any subsequent changes in tax examinations, foreign-exchange exposure, or the company’s assessment of risks disclosed in its annual report.