Climb Global Solutions, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; interim financial statements are unaudited. The company, formerly Wayside Technology Group, changed its name on October 31, 2022. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and results
The company distributes third-party technology products and provides IT solutions through its Distribution and Solutions segments. It generally reports product sales as principal and certain services, maintenance, and cloud sales as agent; consequently, reported net sales may grow more slowly than adjusted gross billings, a non-GAAP volume measure.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $76.3 | $68.9 | $215.4 | $207.1 |
| Gross profit | $13.5 | $11.3 | $38.0 | $33.1 |
| Gross margin | 17.7% | 16.4% | 17.6% | 16.0% |
| Operating income | $3.7 | $3.2 | $11.2 | $7.7 |
| Net income | $2.2 | $2.4 | $7.7 | $5.8 |
| Diluted EPS | $0.50 | $0.55 | $1.74 | $1.31 |
| Adjusted gross billings (non-GAAP) | $264.3 | $226.9 | $744.8 | $672.9 |
| Adjusted EBITDA (non-GAAP) | $4.9 | $4.2 | $13.7 | $10.4 |
Financial position, cash flow, and liquidity
- At September 30, cash was $24.1 million, compared with $29.3 million at December 31, 2021. Current assets were $156.5 million and current liabilities were $137.6 million, including $136.6 million of accounts payable and accrued expenses.
- For the first nine months, operating cash flow was $7.8 million; investing cash outflow was $10.0 million, including $8.5 million net cash paid for the acquisition and $1.5 million in equipment and leasehold purchases. Financing cash outflow was $0.8 million. The $5.2 million overall cash decline also reflected $2.2 million of foreign-exchange effects.
- Term-loan debt outstanding was $1.9 million, bearing 3.73% interest and repayable through April 2026. The $20 million revolving facility and £8 million uncommitted UK facility had no borrowings outstanding. The revolving facility matures June 30, 2023. The company reported compliance with its credit covenants.
- Management said cash and unused facility capacity were expected to cover working-capital and cash needs for the next 12 months. Dividends paid were $2.2 million for the nine-month period, or $0.51 per share.
Changes versus prior comparable periods
- Q3 sales rose 11% and gross profit rose 19%, but net income declined from $2.4 million to $2.2 million and diluted EPS fell from $0.55 to $0.50. SG&A rose 15% to $8.9 million; acquisition costs were $0.4 million, and foreign-currency transaction losses were $0.5 million.
- For nine months, sales rose 4%, gross profit 15%, and net income 35%. Operating margin improved to 5.2% from 3.7%. The increase in Distribution gross profit more than offset slightly lower Solutions gross profit.
- Adjusted gross billings grew faster than reported sales, which management attributed to a greater mix of security, maintenance, and cloud sales reported net as agent, as well as unfavorable foreign exchange. Q3 adjusted EBITDA margin on gross profit (the company’s “effective margin”) was 36.6%, down from 37.4%; the nine-month figure improved to 36.2% from 31.3%.
- Foreign-currency translation losses were $5.5 million for the nine months and reduced comprehensive income to $2.2 million, despite $7.7 million net income. Accumulated other comprehensive loss was $5.7 million at quarter-end.
Acquisition, outlook, and risks
- On August 18, the company acquired Spinnakar Limited for approximately £9.8 million ($11.8 million), plus a potential earn-out valued at approximately $2.0 million. Spinnakar contributed about $1.0 million of Q3 revenue and a $0.4 million net loss. Purchase accounting remained preliminary; the final valuation of goodwill, intangibles, and tax accounts could change. The acquired business’s controls were excluded from the quarter’s controls assessment while integration proceeds.
- No specific revenue or earnings guidance was provided. Management expects SG&A as a share of adjusted gross billings to vary with sales and investment in growth initiatives; it also expects working-capital needs to increase as the business grows.
- Risks highlighted include vendor and customer acceptance and concentration, competitive pricing, product mix, vendor rebates and discounts, foreign-exchange movements, integration of acquisitions, customer credit and receivables, and market or IT-spending conditions. Two customers represented 22% and 16% of nine-month sales; two vendors represented 18% and 9% of purchases. Management reported no significant Q3 operating disruption from COVID-19 but said future effects were uncertain.
- The company cited inflation as historically manageable in its business, while warning that competitive pressure could limit its ability to pass price increases to customers. Management reported effective disclosure controls, with the stated Spinnakar exclusion.
Important facts for investors to verify
- Whether Spinnakar meets acquisition expectations, how its preliminary purchase-price allocation changes, and whether earn-out targets are achieved.
- Whether operating cash generation can support growth and working capital, particularly given substantial receivables and accounts payable.
- The extent of foreign-exchange exposure and its effect on reported earnings, cash, and equity.
- Ongoing dependence on a small number of major customers and vendors, and the durability of vendor rebates and customer pricing.
- Repayment and refinancing plans for facilities maturing in 2023, covenant headroom, and integration of Spinnakar’s internal controls.