Business context and reporting period
Wayside Technology Group, Inc. (the registrant named in this filing; the request metadata identifies Climb Global Solutions) reported unaudited results for the quarter ended March 31, 2019, compared with the quarter ended March 31, 2018. It distributes third-party technology products through Lifeboat Distribution and resells software, hardware and services through TechXtend.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $44.858 million | $40.552 million | Up 11% |
| Gross profit | $7.234 million | $6.894 million | Up 5% |
| Operating income | $1.719 million | $1.847 million | Down 7% |
| Net income | $1.463 million | $1.598 million | Down 8% |
| Diluted EPS | $0.32 | $0.36 | Down $0.04 |
| Operating cash flow | $0.028 million | $2.480 million | Down $2.452 million |
- Gross margin fell to 16.1% from 17.0%; gross margin on adjusted gross billings, a company-defined non-GAAP measure, was 5.1% versus 5.5%. Net income was 3.3% of sales versus 3.9%.
- SG&A increased 9% to $5.515 million, mainly reflecting additional sales personnel and marketing to support new vendor product lines. SG&A was 12.3% of sales versus 12.4%.
- Cash and cash equivalents were $14.062 million at March 31, 2019, compared with $14.883 million at December 31, 2018. Operating cash flow was nearly breakeven as working-capital movements offset earnings and non-cash adjustments.
- The company used $0.082 million in investing activities and $0.787 million in financing activities, including $0.767 million of dividends. The quarterly dividend was $0.17 per share.
- There were no borrowings under the $20 million revolving credit facility; it matures August 31, 2020. The company said cash and unused facility capacity should cover working-capital and cash needs for at least 12 months.
- Total assets were $111.164 million and total liabilities $69.623 million at quarter-end. Current assets were $104.199 million and current liabilities $67.158 million. The filing reports no debt borrowings; lease liabilities totaled $2.875 million.
Material changes versus the prior comparable period
- Lifeboat Distribution sales increased 9% to $40.055 million, attributed mainly to deeper sales penetration in significant product lines and new product lines. Segment income before taxes declined to $3.714 million from $4.149 million.
- TechXtend sales increased 29% to $4.803 million, primarily from several large enterprise transactions; segment income before taxes rose to $0.599 million from $0.310 million. Management cautioned that TechXtend sales can fluctuate with large-customer spending decisions.
- Adjusted gross billings rose 13% to $141.866 million. This non-GAAP measure adds certain costs of net-reported service and security sales to GAAP net sales.
- Gross margin pressure reflected product mix: security, maintenance and third-party services recorded net were 10.4% of net sales versus 11.6% a year earlier. Management estimated this mix shift reduced gross margin as a percentage of sales by 110 basis points, partly offset by higher margins on gross-reported products.
- The effective tax rate increased to 25.0% from 23.4%. Foreign currency translation contributed $0.127 million of other comprehensive income, compared with a $0.180 million loss in Q1 2018.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects to continue investing in business development, sales and marketing, and stated that working-capital needs may increase with business growth.
- Management cited competitive pricing and historically declining gross product margins, product mix, IT spending and customer demand, vendor relationships and incentives, product availability, and quarterly timing variability as factors that could affect results.
- Customer concentration is significant: two customers represented 44% of Q1 2019 sales (26% and 18%). Those customers represented 41% and 9% of net receivables at quarter-end. Two vendors accounted for 28% and 16% of purchases.
- International operations generated 11.7% of sales; the company identified Canadian-dollar and euro exchange-rate movements and foreign-market conditions as risks.
- Adoption of the new lease standard on January 1, 2019 added operating lease right-of-use assets and liabilities. At adoption, the company recognized approximately $3.0 million of lease liabilities and $2.2 million of right-of-use assets, with no equity impact. Quarter-end lease liabilities were $2.875 million.
- The company disclosed a prior $0.5 million accrual, net of federal tax benefit, for potential state income tax liabilities related to economic-nexus jurisdictions where it had not filed returns. It considered accruals adequate; the filing does not describe a resolution.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Confirm the registrant identity and corporate-name relationship: this historical filing is for Wayside Technology Group, Inc., while the request metadata names Climb Global Solutions, Inc.
- Monitor whether sales growth translates into improved operating income and whether product mix continues to pressure gross margins.
- Assess concentration and credit exposure from major customers and vendors, including the large share of sales and receivables represented by two customers.
- Track working-capital movements and operating cash generation, given Q1 operating cash flow of only $0.028 million despite positive net income.
- Review the state tax accrual, lease obligations, and compliance with the revolving facility’s financial covenants.