Climb Global Solutions, Inc. annual report, FY2020

Business Context and Reporting Period

Wayside Technology Group, Inc. (NASDAQ: WSTG), which operates its distribution business as Climb Channel Solutions, filed this Form 10-K for the fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. The company distributes third-party IT products and provides IT solutions through its Distribution and Solutions segments.

• Distribution generated approximately 93% of 2020 net sales and 88% of gross profit; Solutions generated approximately 7% of net sales and 12% of gross profit.
• The company acquired Canadian distributor Interwork in April and UK-based CDF Group in November 2020, expanding its cybersecurity, geographic and cloud-support capabilities.

Key Financial Metrics

Amounts below are in U.S. dollars; annual financial statement amounts are in millions unless noted.

• Fourth-quarter 2020 net sales were $71.4 million, gross profit was $10.5 million, and net income was $2.5 million; diluted EPS was $0.58. Fourth-quarter 2019 figures were $60.9 million, $7.9 million, $2.0 million, and $0.45, respectively.
• Year-end total assets were $165.5 million and stockholders’ equity was $44.7 million. The company had no revolving-credit borrowings outstanding at year-end. Its amended facility provides up to $20 million and matures June 30, 2023.
• Dividends were $0.68 per share in both years; 2020 cash dividends totaled $3.0 million. Cash used for treasury-stock purchases was $3.7 million.

Material Changes Versus the Prior Comparable Period

• Net sales rose 21%, reflecting contributions from Interwork and CDF as well as organic growth in existing Distribution vendor lines. Distribution sales increased 21%; Solutions sales increased 17%, largely due to CDF.
• Gross profit rose 10%, slower than sales growth. Gross margin as a percentage of adjusted gross billings fell to 4.5% from 5.0%, partly reflecting early-payment discounts offered to a large customer.
• Net income declined 34% and operating income declined 37%. Expenses included $1.6 million of legal and advisory costs related to an unsolicited bid and shareholder matter, $1.5 million of acquisition costs, and higher SG&A and amortization.
• Operating cash flow increased sharply, principally because a change in payment terms with a large customer reduced receivables and increased cash by approximately $30 million. Management said the program also reduced 2020 net sales and gross profit by approximately $1.1 million.
• Cash used for acquisitions was $16.8 million, primarily for CDF and Interwork. Cash increased by $14.4 million overall during the year.

Outlook, Commentary, Risks and Unusual Items

• Management stated that cash on hand and unused credit-facility capacity should cover working-capital and cash needs for the next 12 months. It expects working-capital requirements to rise with growth and plans further investment in IT and sales and marketing.
• The company planned to complete CDF’s operational integration in 2021, expand cloud-support capabilities, and continue assessing acquisitions. No quantified earnings or revenue guidance is provided.
• Management reported no significant operational disruption from COVID-19 in 2020, but could not predict the pandemic’s future effect. Most employees were working remotely into early 2021.
• Key risks include reliance on major customers and vendors, intense pricing pressure and low distribution margins, customer credit and collection exposure, vendor direct-sales and electronic distribution, acquisition integration and valuation, foreign exchange, cybersecurity, and economic and pandemic uncertainty. CDW and SHI represented 24% and 14% of 2020 sales; the top five customers represented 52%. The two largest vendors accounted for 32% of purchases.
• An unsolicited acquisition proposal and related shareholder dispute were settled in April 2020. The company dismissed its lawsuit with prejudice and repurchased a former CEO’s 261,631 shares for $3.5 million; it recorded $1.6 million in related net legal and advisory expense and $0.3 million in insurance proceeds.
• The independent auditor issued unqualified opinions on the financial statements and internal controls. Management and the auditor excluded CDF’s internal controls from the year-end control assessment; CDF represented 12% of assets and 2% of 2020 sales.

Important Facts for Investors to Verify

• How much of reported sales growth and future earnings depends on acquired businesses versus organic growth, and whether CDF integration delivers expected benefits.
• Whether the large-customer early-payment arrangement and resulting working-capital cash benefit are sustainable, and how its sales and margin effects evolve.
• Customer and vendor concentration, receivables quality, and exposure to pricing pressure and vendor channel changes.
• The final purchase-price allocations and valuations for Interwork and CDF, including goodwill, intangible assets, and the Interwork earn-out.
• Future dividend and repurchase decisions, liquidity needs, and the terms and availability of the revolving credit facility.