Climb Global Solutions, Inc. (filed as Wayside Technology Group, Inc.) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The filing identifies the registrant as Wayside Technology Group, Inc.
Business context and results
The company operated through TechXtend, which sells technology products and services directly to end users, and Lifeboat, which distributes technical software through resellers and other channel partners. Unless stated otherwise, amounts below are in millions of dollars.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $60.7 | $48.4 | $112.2 | $88.8 |
| Gross profit | $5.6 | $4.7 | $10.4 | $8.7 |
| Gross margin | 9.2% | 9.7% | 9.3% | 9.7% |
| SG&A | $3.6 | $3.2 | $7.2 | $6.2 |
| Operating income | $2.0 | $1.5 | $3.3 | $2.5 |
| Net income | $1.2 | $1.1 | $2.1 | $1.7 |
| Diluted EPS | $0.26 | $0.23 | $0.45 | $0.38 |
Financial position and cash flow
- At June 30, cash and equivalents were $11.7 million and marketable securities were $1.4 million, versus $11.0 million and $4.5 million, respectively, at December 31, 2010. Current assets were $54.7 million and current liabilities $34.7 million.
- Total liabilities were $34.8 million, principally accounts payable and accrued expenses of $34.6 million. Capital lease obligations totaled $179,000; the company reported no long-term debt or credit facility.
- For the first six months, operating cash flow was only $9,000, compared with $3.2 million in 2010. A $4.5 million reduction in receivables was largely offset by a $7.2 million decrease in accounts payable and accrued expenses.
- Investing activities provided $3.0 million, mainly from $3.1 million of securities redemptions; financing activities used $2.4 million, including $1.5 million of dividends and $1.1 million of share repurchases. Cash increased $712,000 overall.
- Dividends paid were $0.16 per share in Q2 and $0.32 per share for the six-month period. The company stated that cash on hand should meet working-capital and cash needs for at least 12 months.
Material changes and management commentary
- Q2 sales increased 25% year over year, and six-month sales increased 26%. Lifeboat drove the growth: sales rose 37% in Q2 and 36% for the six months. TechXtend sales declined 7% in Q2 and 1% for the six months.
- Management attributed Lifeboat growth to its virtual-infrastructure focus, new product lines, and deeper account penetration. Gross-profit dollars rose, but gross margin fell, reflecting segment mix, competitive pricing, and aggressively priced large bids; management said it planned to continue pursuing such bids.
- SG&A increased in dollars, largely due to employee-related costs; it declined as a share of sales. Management said SG&A as a percentage of sales may vary by quarter and that it would monitor expenses.
- Canadian operations generated $8.8 million of six-month sales, versus $7.1 million a year earlier. The company noted foreign-exchange exposure related to its Canadian business.
- The effective tax rate was 39.6% for the first six months of 2011, versus 37.3% in 2010; the prior-year rate benefited from a $78,000 reversal of an uncertain-tax-position liability.
Outlook, risks, and contingencies
The filing provides no specific financial guidance. Management cautioned that results may fluctuate with sales mix and volume, vendor relationships and incentives, product availability and demand, customer payment capacity, pricing pressure, and other software-industry conditions. A major vendor accounted for 11.9% of six-month purchases; three customers together accounted for 36.2% of six-month sales. The company reported $713,000 of contractual obligations, mainly operating leases and capital leases, and no off-balance-sheet arrangements. Management stated that disclosure controls were effective and that no material change in internal control was identified during the quarter.
Important facts for investors to verify
- Whether Lifeboat’s rapid growth and new product lines can continue, and how the growth affects gross margins.
- Whether weak operating cash generation—despite higher earnings—persists as receivables and payables fluctuate.
- Exposure to major vendors and customers, including vendor rebate targets and customer credit risk.
- Capital allocation through dividends and repurchases relative to working-capital needs and the absence of a credit facility.
- Foreign-currency, competitive-pricing, and tax risks, as well as the filing’s cautions that interim results may not indicate full-year performance.